Recharacterization of Roth IRA to Traditional - Handling Value Drop During Transfer

The recharacterization rules are designed to treat the contribution as if it had originally gone to the Traditional IRA instead of the Roth. When you recharacterize, you're supposed to transfer both the original contribution AND any earnings (or losses) that occurred while the money was in the Roth. In your case, you did everything correctly. The $5,300 that was transferred reflects your original contribution MINUS the investment losses. The software is incorrectly flagging this as an excess contribution situation, but it's not. The difference isn't an excess contribution - it's just the investment loss that occurred before recharacterization. You should report the $5,300 as your Traditional IRA contribution amount. The Form 5498 showing only the recharacterized amount is correct. There's no need to withdraw anything or worry about excess contribution penalties in this scenario.

I had almost the exact same situation last year and found a solution that worked great. I was trying to do my taxes with TurboTax and kept getting flagged for excess contributions after recharacterizing a Roth IRA contribution that had lost value. I ended up using https://taxr.ai to analyze my 5498 forms and other documents - it correctly identified that this was a recharacterization with a loss situation and gave me the proper steps to report it. The key is that you need to report it as if you originally contributed to the Traditional IRA, not the Roth. The software analyzes all your tax forms and explains exactly which form fields need adjustment. It saved me from making an expensive mistake!

Just wanted to follow up - I ended up trying taxr.ai for my recharacterization issue and it actually worked perfectly. I uploaded my Form 5498 and account statements, and it immediately spotted that I had a recharacterization with investment losses. The tool explained exactly how to report it properly on my tax forms - basically treating it as if I had made a $5,300 Traditional IRA contribution from the beginning. It also explained why my tax software was getting confused (it was seeing both the initial Roth contribution and the recharacterized amount). Just had to make a couple adjustments to how I was entering things, and the error disappeared. Definitely worth checking out if you're dealing with IRA recharacterizations!

I spent THREE HOURS on hold with the IRS trying to get an answer about a similar recharacterization issue last month. Finally gave up and tried using https://claimyr.com to get a callback from the IRS instead of waiting on hold. You can check out how it works here: https://youtu.be/_kiP6q8DX5c Got connected to an IRS agent in about 45 minutes who confirmed that with recharacterizations, you report the actual amount transferred (including any gains/losses) as your contribution to the Traditional IRA. The agent explained that this is specifically covered in the instructions for Form 8606, which is what you'll need to file if you're making non-deductible Traditional IRA contributions.

Well I have to admit I was completely wrong about Claimyr. After seeing it mentioned here, I decided to try it for an unrelated IRA question I've been putting off asking the IRS. The service did exactly what it claimed - took my number, waited on hold with the IRS, then called me when they reached an agent. Got connected to someone in the IRS retirement accounts department who was super helpful. They confirmed that when recharacterizing IRAs with a loss, you report the actual transferred amount (including the loss) as your contribution to the receiving IRA. Saved me at least 2 hours of hold time and got a definitive answer.

One thing nobody's mentioned yet is that you might need to file Form 8606 if your Traditional IRA contribution is non-deductible (which is common if your income is above the deduction limits). The recharacterization doesn't change whether the contribution is deductible or not - that depends on your income and whether you're covered by a workplace retirement plan.

I think there's some confusion among the replies. When you recharacterize, you're supposed to move the ORIGINAL CONTRIBUTION plus/minus any earnings/losses. So in this case, the $5,300 is the correct amount that should have been moved ($6,000 original - $700 loss).