A recharacterization lets you move a contribution from one type of IRA to another — for example, from a traditional IRA to a Roth IRA — and treat it as if it were originally made to the new account type. This article explains how recharacterizations work, which contributions are eligible, how to request one through Gusto Retirement, and what to expect for tax reporting.
A recharacterization is the movement of a contribution from a traditional IRA to a Roth IRA, or vice versa, requested no later than the tax-return due date (plus extensions) for the year the contribution was made. This process treats the contribution as if it were originally made to the other type of IRA.
A contribution plus any associated earnings may be recharacterized for any reason, including if you were ineligible to make or deduct the original contribution due to modified adjusted gross income (MAGI) limits.
The following transactions cannot be recharacterized:
Roth conversions — moving funds from a traditional, SEP, or SIMPLE IRA to a Roth IRA.
IRA transfers and rollovers — transferring or rolling over funds from one IRA to another of the same type, or rollovers from an employer-sponsored retirement plan to a Roth IRA.
The IRS deadline to recharacterize all or a portion of a current-year IRA contribution is your tax return due date plus extensions for the year the contribution was made (generally Oct. 15).
To request a recharacterization, contact us at [email protected] by Sep. 30 of the year following the year the contributions were made.
A recharacterization is done through a direct trustee-to-trustee transfer between your Gusto IRA accounts, rather than a distribution and subsequent rollover.
Important: Once a recharacterization is done, it is irreversible per IRS guidelines.
Recharacterizations are reported to the Internal Revenue Service (IRS) via Form 1099-R and Form 5498. When necessary, Gusto Retirement will issue these forms and publish them in your dashboard for tax purposes.
This form reports the recharacterization itself.
For contributions recharacterized in the same year, it will show a code "N" in Box 7. For example, if a contribution was made on Mar. 31 and recharacterized on Nov. 30 of the same year, the Form 1099-R issued the following January will have a code "N."
For contributions recharacterized in the next year but before the deadline, it will show a code "R" in Box 7. For example, if a contribution was made on Mar. 31 and recharacterized on Apr. 1 of the following year, the Form 1099-R issued the following January will have a code "R."
You'll get a Form 1099-R in January of the year following the recharacterization. This form will report your total distribution, including both the recharacterized contributions plus any net income attributable (related gains).
This form reports the contribution.
Box 4 (Recharacterized contributions) on Form 5498 will report the "contribution" the recharacterization creates for the year the recharacterization occurs.
The original contribution to your traditional or Roth IRA will be reflected on your Form 5498 for the contribution year. The recharacterization will not change this initial reporting.
The recharacterization itself will be reflected on a Form 5498 issued by Jun. 1 of the year following the recharacterization.
If you are filing Form 1040, Individual Income Tax Return, you need to attach a statement to the return explaining the IRA recharacterization. Refer to the Form 8606 instructions, specifically the Recharacterizations section, for details on whether and how to report these transactions.
We strongly encourage you to discuss your tax filings with a qualified financial or tax professional for assistance with any actions you need to take regarding IRA recharacterizations and your tax forms.
This content is for informational purposes only and is not intended to be taken as tax advice. Please contact a tax professional for further information.