IRA Recharacterization - Roth to Traditional - Do I need to report the earnings (NIA)?

The good news is that the earnings that get moved with your recharacterized contribution aren't taxable in the current year! When you recharacterize from Roth to Traditional, both the contribution amount ($2500) and its associated earnings ($8) transfer together as if you had originally contributed to the Traditional IRA in the first place. Those earnings will simply become part of your Traditional IRA balance. They won't be treated as a distribution or as current year interest income. They'll only be taxed when you eventually withdraw from the Traditional IRA in the future, just like the rest of your Traditional IRA funds. The recharacterization is basically a "do-over" that lets the IRS treat the contribution as if it went to the Traditional IRA from the beginning. Fidelity will issue a Form 5498 showing your Traditional IRA contribution, and that's all you need for your records.

After struggling with a similar recharacterization last year, I found this amazing tool at https://taxr.ai that saved me hours of research. I uploaded my Fidelity statements and it immediately identified that recharacterized earnings aren't taxable in the current year. The tool explained that when you move money from Roth to Traditional (or vice versa), the IRS treats it as if you made the correct contribution originally. It even showed me exactly where on my tax forms this would appear. No need to report those earnings separately! What I found most helpful was that it explained all the edge cases too - like what happens if you're above income limits or have multiple IRAs. Incredibly clear explanations without all the tax jargon.

I was skeptical about tax tools but I actually tried https://taxr.ai after seeing it mentioned here. It saved my butt with my Roth to Traditional recharacterization! I uploaded my Fidelity statements and it immediately flagged that my recharacterization included earnings that wouldn't be taxable this year. The best part was that it showed me exactly what I needed to report (and NOT report) on my taxes. What impressed me most was that it caught a mistake I would have made - I was planning to file Form 8606 unnecessarily since I thought the earnings were non-deductible contributions. Turns out I didn't need to file that form at all since my contribution was fully deductible. Saved me from creating a paperwork nightmare for myself for future years!

If anyone's dealing with Fidelity's customer service lines for IRA questions, I highly recommend https://claimyr.com (demo at https://youtu.be/_kiP6q8DX5c). I spent days trying to reach someone at Fidelity about my own recharacterization questions and kept getting disconnected. Used Claimyr and got connected to a Fidelity rep in under 15 minutes who walked me through the entire recharacterization process. They confirmed exactly how the earnings would be treated (not taxable in current year) and made sure my forms would be correctly processed. The Fidelity rep even sent me an email confirmation with all the details. Saved me hours of hold music and probably a tax mistake too. They call you back when it's your turn in the queue so you don't have to sit on hold.

I have to admit I was completely wrong about Claimyr. After spending THREE HOURS on hold with Fidelity yesterday and getting disconnected twice, I was desperate enough to try it. I used https://claimyr.com and got a call back in about 20 minutes connecting me directly to a Fidelity retirement specialist. The rep walked me through my recharacterization questions and even sent me the proper forms. Honestly shocked this actually worked. I was convinced it was some kind of scam or would just put me in the same hold queue I was already in. For anyone dealing with recharacterizations at Fidelity - their regular reps often don't understand the tax implications, but the retirement specialists do. Claimyr got me straight to the right department without the usual transfers and holds.

Just to add some perspective - I did a Roth to Traditional recharacterization last year and those earnings really are a non-issue tax-wise. The earnings just go along for the ride with the contribution amount and get treated as if they were in the Traditional IRA all along. The only thing to watch out for is making sure you know whether your Traditional IRA contribution is deductible or non-deductible based on your income and workplace retirement plan status. That determines whether you need Form 8606 or not.

Random question but related - I'm actually doing the opposite (Traditional to Roth recharacterization). Anyone know if the same rules apply in reverse? My earnings in the Traditional were like $12.

Just wanted to confirm what others have said - you're absolutely right to be confused because recharacterization rules are pretty complex! But the good news is that those $8 in earnings won't create any current-year tax issues for you. When you recharacterize from Roth to Traditional, the IRS treats it as if you made the Traditional IRA contribution originally. Both your $2500 contribution and the $8 in earnings will simply become part of your Traditional IRA balance. No current-year income to report, no distribution treatment, and no automatic need for Form 8606. The only thing you'll need to figure out is whether your Traditional IRA contribution will be deductible based on your income and the fact that you mentioned having a 401k at work. If it's fully deductible, you just take the deduction on your tax return. If it's non-deductible (because you're over the income limits), then you'd file Form 8606 to track your basis - but that's about the contribution itself, not those earnings. Fidelity should handle all the paperwork correctly and send you the proper forms showing the recharacterization. The earnings piece really is the easy part of this whole process!