[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.408A-5]

[Page 512-517]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.408A-5  Recharacterized contributions.

    This section sets forth the following questions and answers that 
provide rules regarding recharacterizing IRA contributions:
    Q-1. Can an IRA owner recharacterize certain contributions (i.e., 
treat a contribution made to one type of IRA as made to a different type 
of IRA) for a taxable year?
    A-1. (a) Yes. In accordance with section 408A(d)(6), except as 
otherwise provided in this section, if an individual makes a 
contribution to an IRA (the FIRST IRA) for a taxable year and then 
transfers the contribution (or a portion of the contribution) in a 
trustee-to-trustee transfer from the trustee of the FIRST IRA to the 
trustee of another IRA (the SECOND IRA), the individual can elect to 
treat the contribution as having been made to the SECOND IRA, instead of 
to the FIRST IRA, for Federal tax purposes. A transfer between the FIRST 
IRA and the SECOND IRA will not fail to be a trustee-to-trustee transfer 
merely because both IRAs are maintained by the same trustee. For 
purposes of section 408A(d)(6), redesignating the FIRST IRA as the 
SECOND IRA will be treated as a transfer of the entire account balance 
from the FIRST IRA to the SECOND IRA.
    (b) This recharacterization election can be made only if the 
trustee-to-trustee transfer from the FIRST IRA to the SECOND IRA is made 
on or before the due date (including extensions) for filing the 
individual's Federal income tax return for the taxable year for which 
the contribution was made to the FIRST IRA. For purposes of this 
section, a conversion that is accomplished through a rollover of a 
distribution from a traditional IRA in a taxable year that, 60 days 
after the distribution (as described in section 408(d)(3)(A)(i)), is 
contributed to a Roth IRA in the next taxable year is treated as a 
contribution for the earlier taxable year.
    Q-2. What is the proper treatment of the net income attributable to 
the amount of a contribution that is being recharacterized?
    A-2. (a) The net income attributable to the amount of a contribution 
that is

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being recharacterized must be transferred to the SECOND IRA along with 
the contribution.
    (b) If the amount of the contribution being recharacterized was 
contributed to a separate IRA and no distributions or additional 
contributions have been made from or to that IRA at any time, then the 
contribution is recharacterized by the trustee of the FIRST IRA 
transferring the entire account balance of the FIRST IRA to the trustee 
of the SECOND IRA. In this case, the net income (or loss) attributable 
to the contribution being recharacterized is the difference between the 
amount of the original contribution and the amount transferred.
    (c)(1) If paragraph (b) of this A-2 does not apply, then, for 
purposes of determining net income attributable to IRA contributions, 
the net income attributable to the amount of a contribution is 
determined by allocating to the contribution a pro rata portion of the 
earnings on the assets in the IRA during the period the IRA held the 
contribution. This attributable net income is calculated by using the 
following formula:
[GRAPHIC] [TIFF OMITTED] TR05MY03.003

    (2) For purposes of this paragraph (c), the following definitions 
apply:
    (i) The term adjusted opening balance means the fair market value of 
the IRA at the beginning of the computation period plus the amount of 
any contributions or transfers (including the contribution that is being 
recharacterized pursuant to section 408A(d)(6) and any other 
recharacterizations) made to the IRA during the computation period.
    (ii) The term adjusted closing balance means the fair market value 
of the IRA at the end of the computation period plus the amount of any 
distributions or transfers (including contributions returned pursuant to 
section 408(d)(4) and recharacterizations of contributions pursuant to 
section 408A(d)(6)) made from the IRA during the computation period.
    (iii) The term computation period means the period beginning 
immediately prior to the time the particular contribution being 
recharacterized is made to the IRA and ending immediately prior to the 
recharacterizing transfer of the contribution. If a series of regular 
contributions was made to the IRA, and consecutive contributions in that 
series are being recharacterized, the computation period begins 
immediately prior to the time the first of the regular contributions 
being recharacterized was made.
    (3) When an IRA asset is not normally valued on a daily basis, the 
fair market value of the asset at the beginning of the computation 
period is deemed to be the most recent, regularly determined, fair 
market value of the asset, determined as of a date that coincides with 
or precedes the first day of the computation period. In addition, solely 
for purposes of this paragraph (c), notwithstanding A-3 of this section, 
recharacterized contributions are taken into account for the period they 
are actually held in a particular IRA.
    (4) In the case of an individual with multiple IRAs, the net income 
calculation is performed only on the IRA containing the particular 
contribution to be recharacterized, and that IRA is the IRA from which 
the recharacterizing transfer must be made.
    (5) In the case of multiple contributions made to an IRA for a 
particular year that are eligible for recharacterization, the IRA owner 
can choose (by date and by dollar amount, not by specific assets 
acquired with those dollars) which contribution, or portion thereof, is 
to be recharacterized.
    (6) The following examples illustrate the net income calculation 
under section 408A(d)(6) and this paragraph:

    Example 1. (i) On March 1, 2004, when her Roth IRA is worth $80,000, 
Taxpayer A makes a $160,000 conversion contribution to the Roth IRA. 
Subsequently, Taxpayer A discovers that she was ineligible to make a

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Roth conversion contribution in 2004 and so she requests that the 
$160,000 be recharacterized to a traditional IRA pursuant to section 
408A(d)(6). Pursuant to this request, on March 1, 2005, when the IRA is 
worth $225,000, the Roth IRA trustee transfers to a traditional IRA the 
$160,000 plus allocable net income. No other contributions have been 
made to the Roth IRA and no distributions have been made.
    (ii) The adjusted opening balance is $240,000 [$80,000 + $160,000] 
and the adjusted closing balance is $225,000. Thus the net income 
allocable to the $160,000 is - $10,000 [$160,000 x ($225,000 - $240,000) 
/ $240,000]. Therefore, in order to recharacterize the March 1, 2004, 
$160,000 conversion contribution on March 1, 2005, the Roth IRA trustee 
must transfer from Taxpayer A's Roth IRA to her traditional IRA $150,000 
[$160,000 - $10,000].
    Example 2. (i) On April 1, 2004, when her traditional IRA is worth 
$100,000, Taxpayer B converts the entire amount, consisting of 100 
shares of stock in ABC Corp. and 100 shares of stock in XYZ Corp., by 
transferring the shares to a Roth IRA. At the time of the conversion, 
the 100 shares of stock in ABC Corp. are worth $50,000 and the 100 
shares of stock in XYZ Corp. are also worth $50,000. Taxpayer B decides 
that she would like to recharacterize the ABC Corp. shares back to a 
traditional IRA. However, B may choose only by dollar amount the 
contribution or portion thereof that is to be recharacterized. On the 
date of transfer, November 1, 2004, the 100 shares of stock in ABC Corp. 
are worth $40,000 and the 100 shares of stock in XYZ Corp. are worth 
$70,000. No other contributions have been made to the Roth IRA and no 
distributions have been made.
    (ii) If B requests that $50,000 (which was the value of the ABC 
Corp. shares at the time of conversion) be recharacterized, the net 
income allocable to the $50,000 is $5,000 [$50,000 x ($110,000 - 
$100,000) / $100,000]. Therefore, in order to recharacterize $50,000 of 
the April 1, 2004, conversion contribution on November 1, 2004, the Roth 
IRA trustee must transfer from Taxpayer B's Roth IRA to a traditional 
IRA assets with a value of $55,000 [$50,000 + $5,000].
    (iii) If, on the other hand, B requests that $40,000 (which was the 
value of the ABC Corp. shares on November 1) be recharacterized, the net 
income allocable to the $40,000 is $4,000 [$40,000 x ($110,000 - 
$100,000) / $100,000]. Therefore, in order to recharacterize $40,000 of 
the April 1, 2004, conversion contribution on November 1, 2004, the Roth 
IRA trustee must transfer from Taxpayer B's Roth IRA to a traditional 
IRA assets with a value of $44,000 [$40,000 + $4,000].
    (iv) Regardless of the amount of the contribution recharacterized, 
the determination of that amount (or of the net income allocable 
thereto) is not affected by whether the recharacterization is 
accomplished by the transfer of shares of ABC Corp. or of shares of XYZ 
Corp.

    (7) This paragraph (c) applies for purposes of determining net 
income attributable to IRA contributions, made on or after January 1, 
2004. For purposes of determining net income attributable to IRA 
contributions made before January 1, 2004, see paragraph (c) of this A-2 
of Sec. 1.408A-5 (as it appeared in the April 1, 2003, edition of 26 
CFR part 1).
    Q-3. What is the effect of recharacterizing a contribution made to 
the FIRST IRA as a contribution made to the SECOND IRA?
    A-3. The contribution that is being recharacterized as a 
contribution to the SECOND IRA is treated as having been originally 
contributed to the SECOND IRA on the same date and (in the case of a 
regular contribution) for the same taxable year that the contribution 
was made to the FIRST IRA. Thus, for example, no deduction would be 
allowed for a contribution to the FIRST IRA, and any net income 
transferred with the recharacterized contribution is treated as earned 
in the SECOND IRA, and not the FIRST IRA.
    Q-4. Can an amount contributed to an IRA in a tax-free transfer be 
recharacterized under A-1 of this section?
    A-4. No. If an amount is contributed to the FIRST IRA in a tax-free 
transfer, the amount cannot be recharacterized as a contribution to the 
SECOND IRA under A-1 of this section. However, if an amount is 
erroneously rolled over or transferred from a traditional IRA to a 
SIMPLE IRA, the contribution can subsequently be recharacterized as a 
contribution to another traditional IRA.
    Q-5. Can an amount contributed by an employer under a SIMPLE IRA 
Plan or a SEP be recharacterized under A-1 of this section?
    A-5. No. Employer contributions (including elective deferrals) under 
a SIMPLE IRA Plan or a SEP cannot be recharacterized as contributions to 
another IRA under A-1 of this section. However, an amount converted from 
a SEP IRA or SIMPLE IRA to a Roth IRA may be recharacterized under A-1 
of this section as a contribution to a

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SEP IRA or SIMPLE IRA, including the original SEP IRA or SIMPLE IRA.
    Q-6. How does a taxpayer make the election to recharacterize a 
contribution to an IRA for a taxable year?
    A-6. (a) An individual makes the election described in this section 
by notifying, on or before the date of the transfer, both the trustee of 
the FIRST IRA and the trustee of the SECOND IRA, that the individual has 
elected to treat the contribution as having been made to the SECOND IRA, 
instead of the FIRST IRA, for Federal tax purposes. The notification of 
the election must include the following information: the type and amount 
of the contribution to the FIRST IRA that is to be recharacterized; the 
date on which the contribution was made to the FIRST IRA and the year 
for which it was made; a direction to the trustee of the FIRST IRA to 
transfer, in a trustee-to-trustee transfer, the amount of the 
contribution and net income allocable to the contribution to the trustee 
of the SECOND IRA; and the name of the trustee of the FIRST IRA and the 
trustee of the SECOND IRA and any additional information needed to make 
the transfer.
    (b) The election and the trustee-to-trustee transfer must occur on 
or before the due date (including extensions) for filing the 
individual's Federal income tax return for the taxable year for which 
the recharacterized contribution was made to the FIRST IRA, and the 
election cannot be revoked after the transfer. An individual who makes 
this election must report the recharacterization, and must treat the 
contribution as having been made to the SECOND IRA, instead of the FIRST 
IRA, on the individual's Federal income tax return for the taxable year 
described in the preceding sentence in accordance with the applicable 
Federal tax forms and instructions.
    (c) The election to recharacterize a contribution described in this 
A-6 may be made on behalf of a deceased IRA owner by his or her 
executor, administrator, or other person responsible for filing the 
final Federal income tax return of the decedent under section 
6012(b)(1).
    Q-7. If an amount is initially contributed to an IRA for a taxable 
year, then is moved (with net income attributable to the contribution) 
in a tax-free transfer to another IRA (the FIRST IRA for purposes of A-1 
of this section), can the tax-free transfer be disregarded, so that the 
initial contribution that is transferred from the FIRST IRA to the 
SECOND IRA is treated as a recharacterization of that initial 
contribution?
    A-7. Yes. In applying section 408A(d)(6), tax-free transfers between 
IRAs are disregarded. Thus, if a contribution to an IRA for a year is 
followed by one or more tax-free transfers between IRAs prior to the 
recharacterization, then for purposes of section 408A(d)(6), the 
contribution is treated as if it remained in the initial IRA. 
Consequently, an individual may elect to recharacterize an initial 
contribution made to the initial IRA that was involved in a series of 
tax-free transfers by making a trustee-to-trustee transfer from the last 
IRA in the series to the SECOND IRA. In this case the contribution to 
the SECOND IRA is treated as made on the same date (and for the same 
taxable year) as the date the contribution being recharacterized was 
made to the initial IRA.
    Q-8. If a contribution is recharacterized, is the recharacterization 
treated as a rollover for purposes of the one-rollover-per-year 
limitation of section 408(d)(3)(B)?
    A-8. No, recharacterizing a contribution under A-1 of this section 
is never treated as a rollover for purposes of the one-rollover-per-year 
limitation of section 408(d)(3)(B), even if the contribution would have 
been treated as a rollover contribution by the SECOND IRA if it had been 
made directly to the SECOND IRA, rather than as a result of a 
recharacterization of a contribution to the FIRST IRA.
    Q-9. If an IRA owner converts an amount from a traditional IRA to a 
Roth IRA and then transfers that amount back to a traditional IRA in a 
recharacterization, may the IRA owner subsequently reconvert that amount 
from the traditional IRA to a Roth IRA?
    A-9. (a)(1) Except as otherwise provided in paragraph (b) of this A-
9, an IRA owner who converts an amount from a traditional IRA to a Roth 
IRA

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during any taxable year and then transfers that amount back to a 
traditional IRA by means of a recharacterization may not reconvert that 
amount from the traditional IRA to a Roth IRA before the beginning of 
the taxable year following the taxable year in which the amount was 
converted to a Roth IRA or, if later, the end of the 30-day period 
beginning on the day on which the IRA owner transfers the amount from 
the Roth IRA back to a traditional IRA by means of a recharacterization 
(regardless of whether the recharacterization occurs during the taxable 
year in which the amount was converted to a Roth IRA or the following 
taxable year). Thus, any attempted reconversion of an amount prior to 
the time permitted under this paragraph (a)(1) is a failed conversion of 
that amount. However, see Sec. 1.408A-4 A-3 for a remedy available to 
an individual who makes a failed conversion.
    (2) For purposes of paragraph (a)(1) of this A-9, a failed 
conversion of an amount resulting from a failure to satisfy the 
requirements of Sec. 1.408A-4 A-1(a) is treated as a conversion in 
determining whether an IRA owner has previously converted that amount.
    (b)(1) An IRA owner who converts an amount from a traditional IRA to 
a Roth IRA during taxable year 1998 and then transfers that amount back 
to a traditional IRA by means of a recharacterization may reconvert that 
amount once (but no more than once) on or after November 1, 1998 and on 
or before December 31, 1998; the IRA owner may also reconvert that 
amount once (but no more than once) during 1999. The rule set forth in 
the preceding sentence applies without regard to whether the IRA owner's 
initial conversion or recharacterization of the amount occurred before, 
on, or after November 1, 1998. An IRA owner who converts an amount from 
a traditional IRA to a Roth IRA during taxable year 1999 that has not 
been converted previously and then transfers that amount back to a 
traditional IRA by means of a recharacterization may reconvert that 
amount once (but no more than once) on or before December 31, 1999. For 
purposes of this paragraph (b)(1), a failed conversion of an amount 
resulting from a failure to satisfy the requirements of Sec. 1.408A-4 
A-1(a) is not treated as a conversion in determining whether an IRA 
owner has previously converted that amount.
    (2) A reconversion by an IRA owner during 1998 or 1999 for which the 
IRA owner is not eligible under paragraph (b)(1) of this A-9 will be 
deemed an excess reconversion (rather than a failed conversion) and will 
not change the IRA owner's taxable conversion amount. Instead, the 
excess reconversion and the last preceding recharacterization will not 
be taken into account for purposes of determining the IRA owner's 
taxable conversion amount, and the IRA owner's taxable conversion amount 
will be based on the last reconversion that was not an excess 
reconversion (unless, after the excess reconversion, the amount is 
transferred back to a traditional IRA by means of a recharacterization). 
An excess reconversion will otherwise be treated as a valid 
reconversion.
    (3) For purposes of this paragraph (b), any reconversion that an IRA 
owner made before November 1, 1998 will not be treated as an excess 
reconversion and will not be taken into account in determining whether 
any later reconversion is an excess reconversion.
    (c) In determining the portion of any amount held in a Roth IRA or a 
traditional IRA that an IRA owner may not reconvert under this A-9, any 
amount previously converted (or reconverted) is adjusted for subsequent 
net income thereon.
    Q-10. Are there examples to illustrate the rules in this section?
    A-10. The rules in this section are illustrated by the following 
examples:

    Example 1. In 1998, Individual C converts the entire amount in his 
traditional IRA to a Roth IRA. Individual C thereafter determines that 
his modified AGI for 1998 exceeded $100,000 so that he was ineligible to 
have made a conversion in that year. Accordingly, prior to the due date 
(plus extensions) for filing the individual's Federal income tax return 
for 1998, he decides to recharacterize the conversion contribution. He 
instructs the trustee of the Roth IRA (FIRST IRA) to transfer in a 
trustee-to-trustee transfer the amount of the contribution, plus net 
income, to the trustee of a new traditional IRA (SECOND IRA). The 
individual notifies the trustee of the FIRST IRA and the trustee of the 
SECOND IRA that he is recharacterizing his

[[Page 517]]

IRA contribution (and provides the other information described in A-6 of 
this section). On the individual's Federal income tax return for 1998, 
he treats the original amount of the conversion as having been 
contributed to the SECOND IRA and not the Roth IRA. As a result, for 
Federal tax purposes, the contribution is treated as having been made to 
the SECOND IRA and not to the Roth IRA. The result would be the same if 
the conversion amount had been transferred in a tax-free transfer to 
another Roth IRA prior to the recharacterization.
    Example 2. In 1998, an individual makes a $2,000 regular 
contribution for 1998 to his traditional IRA (FIRST IRA). Prior to the 
due date (plus extensions) for filing the individual's Federal income 
tax return for 1998, he decides that he would prefer to contribute to a 
Roth IRA instead. The individual instructs the trustee of the FIRST IRA 
to transfer in a trustee-to-trustee transfer the amount of the 
contribution, plus attributable net income, to the trustee of a Roth IRA 
(SECOND IRA). The individual notifies the trustee of the FIRST IRA and 
the trustee of the SECOND IRA that he is recharacterizing his $2,000 
contribution for 1998 (and provides the other information described in 
A-6 of this section). On the individual's Federal income tax return for 
1998, he treats the $2,000 as having been contributed to the Roth IRA 
for 1998 and not to the traditional IRA. As a result, for Federal tax 
purposes, the contribution is treated as having been made to the Roth 
IRA for 1998 and not to the traditional IRA. The result would be the 
same if the conversion amount had been transferred in a tax-free 
transfer to another traditional IRA prior to the recharacterization.
    Example 3. The facts are the same as in Example 2, except that the 
$2,000 regular contribution is initially made to a Roth IRA and the 
recharacterizing transfer is made to a traditional IRA. On the 
individual's Federal income tax return for 1998, he treats the $2,000 as 
having been contributed to the traditional IRA for 1998 and not the Roth 
IRA. As a result, for Federal tax purposes, the contribution is treated 
as having been made to the traditional IRA for 1998 and not the Roth 
IRA. The result would be the same if the contribution had been 
transferred in a tax-free transfer to another Roth IRA prior to the 
recharacterization, except that the only Roth IRA trustee the individual 
must notify is the one actually making the recharacterization transfer.
    Example 4. In 1998, an individual receives a distribution from 
traditional IRA 1 and contributes the entire amount to traditional IRA 2 
in a rollover contribution described in section 408(d)(3). In this case, 
the individual cannot elect to recharacterize the contribution by 
transferring the contribution amount, plus net income, to a Roth IRA, 
because an amount contributed to an IRA in a tax-free transfer cannot be 
recharacterized. However, the individual may convert (other than by 
recharacterization) the amount in traditional IRA 2 to a Roth IRA at any 
time, provided the requirements of Sec. 1.408A-4 A-1 are satisfied.

[T.D. 8816, 64 FR 5605, Feb. 4, 1999, as amended by T.D. 9056, 68 FR 
23589, May 5, 2003]