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October 13, 2014

10 Bullet Points for a Recharacterization of a Roth Conversion

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by Denise Appleby MJ, CISP, CRC, CRPS, CRSP, APA

Important: The Tax Cuts and Jobs Act of 2017 repealed the option to recharacterize Roth conversions, for Roth conversions done after 2017.  As such, only regular contributions to traditional IRAs and Roth IRAs may now be recharacterized.

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  1. The deadline for recharacterizing a Roth conversion  that was done during last year is October 15 of this year[1] (Generally tax filing due date. But, if the Roth IRA owner files his/her tax return or files for an extension by the due date – which is April 15[2] for calendar year taxpayers, he/she gets an automatic 6-months extension— to October 15 for calendar year taxpayers)
  2. The custodian should receive the paperwork/instructions before October 15, so that they can process the recharacterization by October 15,
  3. A partial or full recharacterization can be done. A tax professional should be consulted to determine which makes better tax sense for the IRA owner
  4. If less than the entire Roth IRA balance is being recharacterized, a calculation of the net income attributable (NIA) to the recharacterization must be done.
  5. The NIA- which can be earnings or losses, must accompany the amount being recharacterized.
  6. Form 8606 must be filed if a partial recharacterization ( instead of a full recharacterization) of the conversion amount is done
  7. The recharacterization can be done ‘in-kind’. No need to liquidate securities to accommodate the recharacterization unless the IRA owner wants to (liquidate securities)
  8. A 1099-R and Form 5498 should have bene issued for the Roth conversion. A second set of 1099-R and 5498 should be issued for the recharacterization.
  9. The market value reported on each set of Form 1099-R and 5498 will likely be different. This difference can be explained to the IRS by attaching an explanation to the tax return
  10. If the tax return was already filed, an amended tax-return will need to be filed.

These bullet points should not be consider as a comprehensive/detailed explanation under any circumstances.An IRA owner should consult a tax/financial professional for assistance with determining if, when and how a recharacterization should be done.

 


[1] If the deadline falls on a weekend or public holiday, it is extended to the next business day

[2] If the deadline falls on a weekend or public holiday, it is extended to the next business day

Originally published 2012. Updated 

Want to learn more about recharacterizations, see the article Roth Conversion Lost Value? Nullify it by Recharacterization!

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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