Income and Assets · Retirement income

IRA conversions and recharacterization

Verification 2026 Verified
tax year · reviewed 2026-08-19 · Draft for I. Ohu review

The exam outline names this topic after two transactions. Only one of them still exists. A conversion — moving money from a traditional IRA or an employer plan into a Roth IRA and paying the tax now — is alive and unrestricted. A recharacterization of that conversion — the old undo, exercised when the market fell between January and October — was repealed for taxable years beginning after 2017. Recharacterizing an ordinary annual contribution survives untouched. The distinction between those two words is the whole topic.

The rule

A conversion is a taxable distribution that is not a distribution. Where a distribution from an eligible retirement plan is contributed to a Roth IRA in a qualified rollover contribution, gross income includes any amount that would have been includible were it not part of such a contribution (IRC § 408A(d)(3)(A)(i), (B)). Converting an individual retirement plan other than a Roth IRA is treated as a distribution to which that paragraph applies (IRC § 408A(d)(3)(C)) — so a trustee-to-trustee redesignation, with no money leaving the institution, is taxed as if the owner had taken the cash.

The early distribution tax is switched off. In the very next clause, “section 72(t) shall not apply” (IRC § 408A(d)(3)(A)(ii)). A 40-year-old who converts a large balance owes ordinary income tax on the pre-tax portion and no additional tax at all.

How much is taxable is not a question this section answers. The amount includible is whatever “would be includible” on an ordinary distribution, which sends the computation back to IRC § 408(d)(1) and (d)(2), where all individual retirement plans are treated as one contract. Basis therefore comes out pro rata across every traditional, SEP and SIMPLE IRA the owner holds, never out of the converted account. Roth IRAs are excluded from that blend (IRC § 408A(d)(4)(A)).

There is no income ceiling and no filing-status bar. Nothing in § 408A now limits who may convert. And the amount the conversion puts into income is expressly left out of the modified adjusted gross income that governs whether the same taxpayer may make a regular Roth contribution (IRC § 408A(c)(3)(B)(i)) — so a conversion cannot push a taxpayer out of eligibility to contribute.

The one-rollover-per-year limit does not apply. The flush text of IRC § 408A(e)(1) disregards, for purposes of § 408(d)(3)(B), any qualified rollover contribution from an individual retirement plan other than a Roth IRA to a Roth IRA. Conversions may be done in any number of tranches in one year.

A five-year clock attaches to each conversion. If any portion of a Roth distribution is properly allocable to a conversion and the distribution is made within the 5-taxable-year period beginning with the taxable year in which that contribution was made, then § 72(t) “shall be applied as if such portion were includible in gross income” (IRC § 408A(d)(3)(F)(i)) — limited to the amount the conversion actually put into income (clause (ii)). This is a recapture of the additional tax that clause (A)(ii) waived, not a second income tax. The period runs from each conversion year, so four successive conversions run four clocks — and it is distinct from the single five-year period in § 408A(d)(2)(B) governing whether a distribution is qualified.

Which dollars come out first is fixed by statute. A Roth distribution comes from regular contributions, then from conversions first-in first-out, and any amount allocated to a conversion goes first to the portion included in gross income (IRC § 408A(d)(4)(B)). The ordering is deliberately unfavourable: the recapture-exposed layer is reached before the untaxed layer of the same conversion.

Recharacterization is an election about a contribution. A contribution made during a taxable year and moved by trustee-to-trustee transfer to another individual retirement plan on or before the due date is treated as made to the transferee plan (IRC § 408A(d)(6)(A)). The transfer must carry the net income allocable to the contribution and applies only to the extent no deduction was allowed (§ 408A(d)(6)(B)(i), (ii)). Due date means the date prescribed by law including extensions (§ 408A(d)(7)), and a taxpayer who filed on time without transferring gets a further six months under Treas. Reg. § 301.9100-2(b), the amended return marked as its paragraph (d) requires.

And it is closed to conversions. “Subparagraph (A) shall not apply in the case of a qualified rollover contribution to which subsection (d)(3) applies (including by reason of subparagraph (C) thereof)” (IRC § 408A(d)(6)(B)(iii)). The parenthetical is doing real work: subparagraph (C) is the clause that treats a traditional-to-Roth conversion as a covered distribution, so the exclusion reaches conversions as well as plan rollovers.

Form 8606 keeps the record. Part II reports conversions from traditional, SEP and SIMPLE IRAs to Roth IRAs; where its last line is zero or less, nothing carries to the taxable-amount line of Form 1040, but the full distribution still appears on the gross line (Instructions for Form 8606, Part II).

Current figures

Item	2026
Amount includible on a conversion	any amount that would be includible in gross income were it not part of a qualified rollover contribution — so the pre-tax portion of the converted amount, and nothing else^TY2026
Additional tax on the conversion itself	does not apply — IRC § 72(t) is switched off for the conversion itself, however large the amount included in gross income^TY2026
Five-year recapture	a distribution allocable to a conversion within the 5-taxable-year period beginning with the taxable year of that conversion is subjected to IRC § 72(t) as if it were includible in gross income, limited to the amount the conversion put into income^TY2026
Income ceiling on converting	none — the modified adjusted gross income ceiling and the joint-filing requirement that once barred converting were struck by Pub. L. 109-222 § 512(a), effective for taxable years beginning after 2009^TY2026
Conversion income in the Roth contribution test	disregarded — an amount included in gross income under IRC § 408A(d)(3) is not taken into account in the modified adjusted gross income that limits a regular Roth contribution^TY2026
One-rollover-per-year limit	does not apply — the one-rollover-per-year limit of IRC § 408(d)(3)(B) is expressly disregarded for a qualified rollover contribution from a traditional IRA to a Roth IRA^TY2026
Recharacterizing a contribution	a trustee-to-trustee transfer accompanied by the net income allocable to the contribution, made on or before the due date for the taxable year including extensions — with an automatic further 6 months from the unextended due date where the return was timely filed^TY2026
Recharacterizing a conversion	not available — IRC § 408A(d)(6)(A) does not apply to a qualified rollover contribution to which subsection (d)(3) applies, including a conversion, for taxable years beginning after 2017^TY2026
Source of the taxable amount	all individual retirement plans are treated as one contract, all distributions in a year as one distribution, and the contract value, income and investment are computed at the close of the calendar year in which the taxable year begins — with the value increased by distributions made during that year^TY2026
Ordering on a later Roth distribution	contributions first to the extent of aggregate contributions, taking regular contributions before qualified rollover contributions, and those on a first-in first-out basis — earnings last^TY2026

How it works in practice

The mechanical sequence is short. Determine the amount distributed from the traditional side. Determine the aggregate basis in all traditional, SEP and SIMPLE IRAs at the close of the calendar year, using the year-end value increased by distributions made during the year. Apply the ratio. The non-basis fraction is ordinary income — no capital gain treatment, no averaging, and no early distribution tax.

The consequence practitioners most often miss is that a client with a large deductible rollover IRA cannot convert a small nondeductible contribution tax-free. The nondeductible dollars spread across the whole aggregate, so almost all of what is converted is taxable even though the money that moved came from the after-tax account. Whether the client’s plan will accept an incoming rollover of the pre-tax balance — removing it from the § 408(d)(2) aggregate, since a qualified plan is not an individual retirement plan — decides the answer, and it is a plan-document question rather than a tax one.

The second is timing. The tax is fixed at the moment of conversion and can no longer be unwound, so splitting a planned conversion into tranches across several years is the only way to manage the bracket — and each tranche starts its own five-year recapture clock.

Scenario 1 — the pro-rata trap on a small conversion

Devi has a rollover IRA holding 190,000 dollars of entirely pre-tax money from a former employer, and she opens a second traditional IRA in March 2026 with a nondeductible contribution of 7,500 dollars. In November she converts that second account, then worth 7,700 dollars, to a Roth IRA, expecting to report 200 dollars of income.

The aggregation rule of IRC § 408(d)(2)(A) treats both accounts as one contract. Her basis is 7,500 dollars against a combined year-end value of roughly 197,700 dollars, so the basis fraction is a little under four percent, and about 7,400 dollars of the 7,700 converted is includible. The remaining basis stays on the traditional side and is recovered pro rata over future distributions — not lost, but not available now. Had Devi first rolled the 190,000 dollars into her employer’s plan, the aggregate would have been the smaller account alone.

Scenario 2 — the conversion that cannot be undone

Marcus, age 52, converts 300,000 dollars of a traditional IRA to a Roth IRA in February 2026 when the market is high, and includes the pre-tax amount in his 2026 income. By September the account is worth 215,000 dollars. He asks his preparer to recharacterize the conversion so that he is not paying tax on value that has evaporated.

Nothing can be done. IRC § 408A(d)(6)(B)(iii) removes a conversion from the recharacterization election altogether, for taxable years beginning after 2017, so Marcus reports the full amount converted. He owes no additional tax under § 72(t) on the conversion itself (§ 408A(d)(3)(A)(ii)), but withdrawing any of the converted money before 2031 exposes him to the § 408A(d)(3)(F) recapture.

Scenario 3 — the recharacterization that is still available

Priya contributes 7,500 dollars to a Roth IRA for 2026 in April 2026, and discovers in September that her modified adjusted gross income for the year will exceed the Roth phase-out entirely. She has filed her 2026 return on time. Her custodian moves the 7,500 dollars plus 380 dollars of allocable net income to a traditional IRA in a trustee-to-trustee transfer in June 2027.

This is a contribution, not a conversion, so IRC § 408A(d)(6)(A) applies and the transfer is timely under both the extended due date in § 408A(d)(7) and the automatic six-month window in Treas. Reg. § 301.9100-2(b). The 7,500 dollars is treated as contributed to the traditional IRA in the first place, the net income goes with it, and Priya files an amended 2026 return marked as § 301.9100-2(d) directs. Whether that contribution is deductible is a separate § 219(g) question.

Recharacterizing a contribution is not converting it. A Roth contribution moved to a traditional IRA under § 408A(d)(6)(A) is treated as always having been a traditional one. Moving it back later is a conversion under § 408A(d)(3), with the pro-rata rule applying like any other.

The five-year period in § 408A(d)(3)(F) is not the five-year period in § 408A(d)(2)(B). The first runs separately from each conversion year and controls only the additional tax. The second runs once, from the first year any Roth contribution was made, and controls whether a distribution is qualified.

Converting does not restart a required minimum distribution. A required minimum distribution cannot be rolled over, so the first dollars distributed in a year for which one is due are the required amount and cannot be converted (Reg. § 1.408A-4, A-6).

The once-a-year exemption is a statutory direction, not an administrative concession (IRC § 408A(e)(1)).

How this has changed

Three separate statutory changes have left Treas. Reg. § 1.408A-4 stating law that no longer exists. Its A-2 still recites a modified AGI ceiling on converting and a joint-filing requirement, both struck by Pub. L. 109-222 § 512(a) for taxable years beginning after 2009. Its A-5 still says that “only amounts in another IRA can be converted to a Roth IRA” and that qualified plan and § 403(b) amounts cannot be converted directly; § 408A(d)(3)(B) has referred to any eligible retirement plan as defined in § 402(c)(8)(B) since Pub. L. 109-280 § 824. Its A-3 offers a recharacterization remedy for a failed conversion, and A-8 through A-11 work through a four-year income spread available only for 1998. The regulation has not been withdrawn or amended, and reading it as current will produce three wrong answers.

The repeal of conversion recharacterization. Pub. L. 115-97 § 13611(a) added IRC § 408A(d)(6)(B)(iii), applying to taxable years beginning after 31 December 2017. Everything written before 2018 about “reconversion”, the 30-day waiting period in Reg. § 1.408A-5 A-9, and converting several assets into separate Roth accounts to cherry-pick which to keep, describes a regime that is gone. The Instructions for Form 8606 say so in terms.

What survives in the regulations is worth knowing. A-1(a) of Reg. § 1.408A-4 confirms that the one-rollover-per-year limitation does not apply. A-9 confirms that conversion income counts for every other purpose — the taxable portion of social security benefits, the phase-out of the rental real estate loss allowance — while being disregarded for the § 408A modified AGI test. A-12 confirms that converting an IRA under substantially equal periodic payments is neither subject to § 72(t) nor a modification of the series. And A-8 of Reg. § 1.408A-5 confirms that a recharacterization is never a rollover for the once-a-year limit.

Exam focus

Expect the tested point to be the irreversibility, because it is the change candidates are most likely to have learned wrongly from older material. A question describing a conversion followed by a market fall and asking what relief is available has one answer: none.

Expect the pro-rata computation to be tested through a fact pattern with two accounts, where the naive answer is that converting the nondeductible account produces almost no income. Read for whether the taxpayer holds any other traditional, SEP or SIMPLE IRA; if so, aggregate.

Expect § 72(t) to appear twice in one question — switched off for the conversion by § 408A(d)(3)(A)(ii), switched back on for an early withdrawal of the converted amount by § 408A(d)(3)(F). Distinguish those from the qualified-distribution five-year period.

Watch the vocabulary. A question that says “recharacterize a contribution” is asking about a live election with a real deadline; one that says “recharacterize a conversion” is asking whether the candidate knows the election was repealed.

Check yourself

1. In 2026 a 45-year-old converts an entire traditional IRA worth 120,000 dollars, all pre-tax, to a Roth IRA. What taxes apply to the conversion?

Answer: Ordinary income tax on the full 120,000 dollars, and no additional tax under IRC § 72(t), which § 408A(d)(3)(A)(ii) expressly disapplies to the conversion.

2. The same taxpayer withdraws 30,000 dollars from that Roth IRA in 2029. What is the consequence?

Answer: Under § 408A(d)(4)(B) the withdrawal comes from the conversion, taxable portion first, and falling within the 5-taxable-year period beginning in 2026, § 408A(d)(3)(F) applies § 72(t) as if that portion were includible — the additional tax, not income tax again.

3. A taxpayer with modified adjusted gross income far above the Roth phase-out converts 50,000 dollars in March 2026 and wants to make a regular Roth contribution for the same year. Does the conversion income block the contribution?

Answer: No. IRC § 408A(c)(3)(B)(i) excludes any amount included in gross income under § 408A(d)(3) from the modified adjusted gross income used in that test. Whether the contribution is otherwise allowed depends on the taxpayer’s other income.

4. A client made a traditional IRA contribution for 2026 in May 2026, then moved it to a Roth IRA in a trustee-to-trustee transfer in August 2026 with the allocable earnings. Is that a recharacterization?

Answer: It can be, under § 408A(d)(6)(A), but only to the extent no deduction was allowed for the contribution (§ 408A(d)(6)(B)(ii)). To the extent a deduction was allowed, moving the amount to a Roth IRA is a conversion taxed under § 408A(d)(3).

5. Why does it matter whether an undo request concerns a contribution or a conversion?

Answer: § 408A(d)(6)(B)(iii) removes conversions from the recharacterization election for taxable years beginning after 2017. A contribution can still be recharacterized within the due date including extensions; a conversion cannot be recharacterized at all.

Change log

2026-08-19Initial draft. Sets out the IRC § 408A(d)(3) conversion rules, the § 408A(d)(3)(F) five-year recapture, the § 408A(d)(6) recharacterization election and its § 408A(d)(6)(B)(iii) exclusion of conversions, and records that Treas. Reg. § 1.408A-4 has never been conformed to three separate statutory changes.