What is a Roth IRA conversion?
A Roth IRA conversion is a reportable movement of assets from a traditional/SEP/SIMPLE IRA to a Roth IRA.
What are the tax implications of my Roth IRA conversion?
All or a portion of the amount you converted may be taxable to you in the year of your Roth IRA conversion. Conversions are generally taxable in the year the distribution occurred. Use IRS Form 8606 to determine your taxable amount.
What tax forms should I receive related to my Roth IRA conversion?
You should receive Form 1099-R for the distributing traditional/SEP/SIMPLE IRA and Form 5498 for the receiving Roth IRA.
What if I completed a Roth conversion/qualified rollover contribution this calendar year and now realize I want to reverse it?
A recharacterization reverses a Roth IRA conversion/ qualified rollover contribution and eliminates the taxable event of the conversion/qualified rollover contribution. A recharacterization is a trustee-to-trustee transfer of the original funds plus any related earnings since the conversion/qualified rollover contribution occurred. For each of your Roth IRAs, you are allowed one conversion per year. If you recharacterize the conversion, you must wait until the later of January 1 of the following year or 30 days before doing another conversion.
If you moved your company retirement plan/403(b) plan/governmental 457 plan distribution directly to a Roth IRA and now realize you want to reverse the qualified rollover contribution, you can recharacterize the funds to a traditional IRA (even though the funds didn’t originate in an IRA).
Can I recharacterize a traditional or Roth IRA contribution?
Yes. If you made contributions to a traditional or Roth IRA, a recharacterization changes the nature of the contributions. You should report the contributions as if they had been originally made to the IRA to which the contributions were moved. A recharacterization is a trustee-to-trustee transfer of the original contribution plus any related earnings.
What is the deadline for completing a recharacterization?
You have until the due date for filing your tax return, including extensions, to recharacterize a conversion or contribution. In addition, the IRS allows an automatic six-month extension to elect to recharacterize.
Note: If you recharacterize a conversion or contribution made in the previous calendar year, it impacts your tax return even though the recharacterization activity will be reported on the next year's Form 1099-R. You may need to file an amended return if you have already filed your tax return for that year.
How are recharacterizations reported on Forms 1099-R and 5498?
The Roth IRA custodian reports the recharacterization distribution on Form 1099-R, and the traditional IRA custodian reports the same amount on Form 5498.
- Code N on Form 1099-R indicates the conversion/contribution and the recharacterization both occurred in the same year.
- Code R indicates the recharacterization was completed in the year following the year of the original conversion/contribution should have been accounted for on previous year's tax return.
Can a distribution from my company retirement plan go into a Roth IRA?
There are two ways a distribution from your company retirement plan/403(b) plan/governmental 457 plan can be moved to a Roth IRA:
- You can move the distribution directly to a Roth IRA. This type of conversion is referred to as a "qualified rollover contribution."
- You can roll over the distribution to a traditional IRA and then convert the traditional IRA to a Roth IRA.
How is my Roth IRA distribution taxed?
You must treat all of your Roth IRAs as a single Roth IRA for purposes of determining the tax treatment of your distribution(s). All distributions are deemed to come from: Roth IRA contributions first, Roth IRA conversions second, and Roth IRA earnings third.
Roth IRA contributions are not deductible and, therefore, are not subject to income tax upon distribution.
You pay income tax on the amount you take out of your other IRA(s) and convert into your Roth IRA(s). Because of this, the amount of the conversion is not subject to income tax upon distribution from the Roth IR
The only portion of your Roth IRA distribution that may be subject to income tax is the amount of the distribution attributable to earnings. Earnings will not be subject to income tax upon distribution if:
- A five-year “aging” requirement is satisfied; and
- The distribution is made on account of at least one of these:
- Attainment of age 59½
- First-time home purchase ($10,000 lifetime maximum)
Note: Conversions and qualified rollover contributions, while not subject to income tax when distributed, may be subject to a 10% IRS early distribution penalty if a separate five-year aging requirement is not satisfied. See IRS Form 8606 instructions for information on the rules for determining your taxation. Because all your Roth IRAs must be aggregated, Thrivent Mutual Funds cannot determine the taxable amount of your distribution.