Recharacterizations

Generally, you may recharacterize (correct) an IRA contribution or Roth IRA conversion by making a trustee-to-trustee transfer from one IRA to another type of IRA. Trustee-to-trustee transfers are made directly between financial institutions or within the same financial institution. You generally must make the transfer by the due date of your return (including extensions) and reflect it on your return. However, if you timely filed your return without making the transfer, you still may make the transfer within 6 months of the due date of your return, excluding extensions. If necessary, file an amended return reflecting the transfer (see page 5). Write Filed pursuant to section 301.9100-2 on the amended return.

Reporting Recharacterizations

Any recharacterized conversion will be treated as though the conversion had not occurred. Any recharacterized contribution will be treated as having been originally contributed to the second IRA, not the first IRA. The amount transferred must include related earnings or be reduced by any loss. For details on how to figure the earnings, see Notice 2000-39. You can find Notice 2000-39 on page 132 of Internal Revenue Bulletin 2000-30 at www.irs.gov/pub/irs-irbs/irb00-30.pdf. Any earnings or loss that occurred in the first IRA will be treated as having occured in the second IRA. You may not deduct any loss that occurred while the funds were in the first IRA. Also, you cannot take a deduction for a contribution to a traditional IRA if the amount is later recharacterized. See below for how to report the three different types of recharacterizations, including the statement that must be attached to your return explaining the recharacterization.

1. You converted an amount from a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2002 and later recharacterized all or part of the amount back to a traditional, SEP, or SIMPLE IRA. If you only recharacterized part of the amount converted, report the amount not recharacterized on Form 8606. If you recharacterized the entire amount, do not report the recharacterization on Form 8606. In either case, attach a statement to your return explaining the recharacterization and include the amount converted from the traditional, SEP, or SIMPLE IRA on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the recharacterization occurred in 2002, also include the amount transferred back from the Roth IRA on that line. If the recharacterization occurred in 2003, report the amount transferred only in the attached statement, and not on your 2002 or 2003 tax return (a 2003 Form 1099-R should be sent to you by February 2, 2004, stating that you made a recharacterization of an amount converted in the prior year).

   Example. You are married filing jointly and converted $20,000 from your traditional IRA to a new Roth IRA on May 22, 2002. On April 10, 2003, you determine that your 2002 modified AGI for Roth IRA purposes will exceed $100,000, and you are not allowed to make a Roth IRA conversion. The value of the Roth IRA on that date is $19,000. You recharacterize the conversion by transferring that entire amount to a traditional IRA in a trustee-to-trustee transfer. You report $20,000 on Form 1040, line 15a. You do not include the $19,000 on line 15a because it did not occur in 2002 (you also do not report that amount on your 2003 return because it does not apply to the 2003 tax year). You attach a statement to Form 1040 explaining that you made a conversion of $20,000 from a traditional IRA on May 22, 2002, and that you recharacterized the entire amount, which was then valued at $19,000, back to a traditional IRA on April 10, 2003, because your 2002 modified AGI for Roth IRA purposes exceeded $100,000.

2. You made a contribution to a traditional IRA and later recharacterized part or all of it to a Roth IRA. If you recharacterized only part of the contribution, report the nondeductible traditional IRA portion of the remaining contribution, if any, on Form 8606, Part I. If you recharacterized the entire contribution, do not report the contribution on Form 8606. In either case, attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2002, include the amount transferred from the traditional IRA on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the recharacterization occurred in 2003, report the amount transferred only in the attached statement.

   Example. You are single, covered by a retirement plan, and you contributed $3,000 to a new traditional IRA on May 31, 2002. On February 24, 2003, you determine that your 2002 modified AGI will limit your traditional IRA deduction to $1,000. The value of your traditional IRA on that date is $3,300. You decide to recharacterize $2,000 of the traditional IRA contribution as a Roth IRA contribution, and have $2,200 ($2,000 contribution plus $200 related earnings) transferred from your traditional IRA to a Roth IRA in a trustee-to-trustee transfer. You deduct the $1,000 traditional IRA contribution on Form 1040. You are not required to file Form 8606, but you must attach a statement to your return explaining the recharacterization. The statement indicates that you contributed $3,000 to a traditional IRA on May 31, 2002; recharacterized $2,000 of that contribution on February 24, 2003, by transferring $2,000 plus $200 of related earnings from your traditional IRA to a Roth IRA in a trustee-to-trustee transfer; and that all $1,000 of the remaining traditional IRA contribution is deducted on Form 1040. You do not report the $2,200 distribution from your traditional IRA on your 2002 Form 1040 because the distribution occurred in 2003. You do not report the distribution on your 2003 Form 1040 because the recharacterization related to 2002 and was explained in an attachment to your 2002 return.

3. You made a contribution to a Roth IRA and later recharacterized part or all of it to a traditional IRA. Report the nondeductible traditional IRA portion, if any, on Form 8606, Part I. If you did not recharacterize the entire contribution, do not report the remaining Roth IRA portion of the contribution on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2002, include the amount transferred from the Roth IRA on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the recharacterization occurred in 2003, report the amount transferred only in the attached statement, and not on your 2002 or 2003 tax return.

   Example. You are single and contributed $3,000 to a new Roth IRA on June 14, 2002. On December 26, 2002, you determine that your 2002 modified AGI will allow a full traditional IRA deduction. You decide to recharacterize the Roth IRA contribution as a traditional IRA contribution and have $3,200, the balance in the Roth IRA account ($3,000 contribution plus $200 related earnings), transferred from your Roth IRA to a traditional IRA in a trustee-to-trustee transfer. You deduct the $3,000 traditional IRA contribution on Form 1040. You are not required to file Form 8606, but you must attach a statement to your return explaining the recharacterization. The statement indicates that you contributed $3,000 to a new Roth IRA on June 14, 2002; recharacterized that contribution on December 26, 2002, by transferring $3,200, the balance in the Roth IRA, to a traditional IRA in a trustee-to-trustee transfer; and that $3,000 of the traditional IRA contribution is deducted on Form 1040. You include the $3,200 distribution on your 2002 Form 1040, line 15a.

Return of IRA Contributions

If, in 2002, you made traditional IRA contributions or Roth IRA contributions for 2001 or 2002 and you had those contributions returned to you with any related earnings (or less any loss) by the due date (including extensions) of your 2002 tax return, the returned contributions are treated as if they were never contributed. Do not report the contribution or distribution on Form 8606 or take a deduction for the contribution. However, you must report the distribution and any related earnings on your 2002 Form 1040, lines 15a and 15b; Form 1040A, lines 11a and 11b; or Form 1040NR, lines 16a and 16b. Attach a statement explaining the distribution. You may not deduct any loss that occurred (see Pub. 590 for an exception if you withdrew the entire amount in all your traditional or Roth IRAs). Also, if you were under age 59½ at the time of a distribution with related earnings, you generally are subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts).

If you timely filed your 2002 tax return without withdrawing a contribution that you made in 2002, you may still have the contribution returned to you within 6 months of the due date of your 2002 tax return, excluding extensions. If you do, file an amended return with Filed pursuant to section 301.9100-2 written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).

You or the trustee of your IRA may figure the earnings (or loss) as provided in Notice 2000-39, 2000-2 C.B. 132. You can find Notice 2000-39 on page 132 of Internal Revenue Bulletin 2000-30 at www.irs.gov/pub/irs-irbs/irb00-30.pdf. Notice 2000-39 permits the earnings or loss to be determined by allocating to the contribution a pro-rata share of the earnings that accrued in the IRA during the period the IRA held the contribution. If there are no intervening contributions or distributions, the earnings (or loss) is equal to the contribution multiplied by the net change in the value of the IRA divided by the value of the IRA immediately after the contribution was made. The net change in the value of the IRA is equal to the value of the IRA immediately prior to the distribution minus the value of the IRA immediately after the contribution was made. See the example below. If you made a contribution or distribution while the IRA held the returned contribution, see Notice 2000-39.

If you made a contribution in 2001 and you had it returned to you in 2002 as described above, do not report the distribution on your 2002 tax return. Instead, report it on your 2001 original or amended return in the manner described above. Likewise, report on your 2003 tax return any distribution made in 2003 that is a return of contributions that were made in 2003 for 2002 (but be sure that your original or amended 2002 tax return reflects that the contribution is treated as not having been contributed).

Example. On May 31, 2002, you contributed $3,000 to your traditional IRA. The value of the IRA was $18,000 prior to the contribution. On December 28, 2002, when you are age 57 and the value of the IRA is $22,600, you realize you cannot make the entire contribution because your taxable compensation for the year will be only $2,000. You decide to have $1,000 of the contribution returned to you and withdraw $1,076 from your IRA ($1,000 contribution plus $76 earnings). You did not make any other withdrawals or contributions. The earnings were figured according to Notice 2000-39 by first dividing the $1,600 increase in the value of the IRA by $21,000 (the value of the IRA immediately after the contribution) and multiplying the result by $1,000 (the amount being returned). You are not required to file Form 8606. You deduct the $2000 remaining contribution on Form 1040. You include $1,076 on Form 1040, line 15a, and $76 on line 15b. You attach a statement to your tax return explaining the distribution. Because you properly removed the excess contribution with the related earnings by the due date of your tax return, you are not subject to the additional 6% tax on excess contributions. However, because you were under age 59½ at the time of the distribution, the $76 of earnings is subject to the additional 10% tax on early distributions. You include $7.60 on Form 1040, line 58.

Return of Excess Traditional IRA Contributions

The return (distribution) in 2002 of excess traditional IRA contributions for years prior to 2002 is not taxable if all three of the following apply.

1. The distribution was made after the due date, including extensions, of your tax return for the year for which the contribution was made (if the distribution was made earlier, see Return of IRA Contributions on page 4).
2. The total contributions (excluding rollovers and conversions) to your traditional and SEP IRAs for the year for which the excess contribution was made did not exceed $2,000 ($2,250 for years before 1997). If your total IRA contributions for the year included employer contributions to a SEP IRA, increase the $2,000 (or $2,250, if applicable) by the smaller of the employer contributions or $30,000 (or $35,000 for 2001).
3. No deduction was allowable (without regard to the modified AGI limitation) or taken for the excess contributions.

Include the total amount distributed on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, and attach a statement to your return explaining the distribution see the example below. If you meet the above conditions and are otherwise required to file Form 8606:

• Do not take into account the amount of the withdrawn contributions in figuring line 2 and
• Do not include the amount of the withdrawn contributions on line 7.

Example. You are single, you retired in 1999, and you had no taxable compensation after 1999. However, you made traditional IRA contributions (that you did not deduct) of $2,000 in 2000 and 2001. In November 2002, a tax practitioner informed you that you had made excess contributions for those years because you had no taxable compensation. You withdrew the $4,000 and filed amended returns for 2000 and 2001 reflecting the additional 6% tax on excess contributions on Form 5329. You include the $4,000 distribution on your 2002 Form 1040, line 15a, enter -0- on line 15b, and attach a statement to your return explaining the distribution, including the fact that you filed amended returns for 2000 and 2001 and paid the additional 6% tax on the excess contributions for those years. The statement indicates that the distribution is not taxable because

1. it was made after the due dates of your 2000 and 2001 tax returns, including extensions,
2. your total IRA contributions did not exceed $2,000 for 2000 or 2001, and
3. you did not take a deduction for the contributions, and no deduction was allowable because you did not have any taxable compensation for those years.

The statement also indicates that the distribution reduced your excess contributions to zero, as reflected on your 2002 Form 5329 and it indicates your adjusted basis in nondeductible contributions.

Amending Form 8606

After you file your return, you may change a nondeductible contribution to a traditional IRA to a deductible contribution or vice versa. You also may be able to make a recharacterization (see page 3). If necessary, complete a new Form 8606 showing the revised information and file it with Form 1040X, Amended U.S. Individual Income Tax Return.

Penalty for Not Filing

If you are required to file Form 8606 to report a nondeductible contribution to a traditional IRA for 2002 but do not do so, you must pay a $50 penalty, unless you can show reasonable cause.

Overstatement Penalty

If you overstate your nondeductible contributions, you must pay a $100 penalty, unless you can show reasonable cause.

What Records Must I Keep?

To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.

• Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.
• Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years.
• Forms 5498 or similar statements you received each year showing contributions you made to a traditional IRA or Roth IRA.
• Forms 5498 or similar statements you received showing the value of your traditional IRAs for each year you received a distribution.
• Forms 1099-R or W-2P you received for each year you received a distribution.

Note:   Forms 1040-T and W-2P are forms that were used in prior years.

Specific Instructions

Name and social security number (SSN).   If you file a joint return, enter only the name and SSN of the spouse whose information is being reported on Form 8606. If both you and your spouse are required to file Form 8606, file a separate Form 8606 for each of you.

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