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February 16, 2009

Outstanding Recharacterization

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Definition

A conversion that is recharacterized in the year that follows the year in which the conversion was done. For example: A conversion that is done in 2017 and recharacterized in 2018 is an outstanding recharacterization for calculating 2018 RMDs.

Recharacterizations are required to be completed by the individual’s tax filing deadline, including extensions. Individuals who file their tax return by the due date receive an automatic six-month extension, bringing the deadline to October 15 for taxpayers who file on a calendar year.

 

Referring Cite

Treas. Reg. 1.408A-5, Q&A 6, TD 9056, IRC §408A, IRS Publication 590

Additional Helpful Information

An outstanding recharacterization is required to be added to the previous year-end fair market value (FMV) of the receiving traditional IRA when calculating the required minimum distribution (RMD) for the year. For instance, if a conversion is done in 2009 and recharacterized in 2010, the recharacterization be added back to the 12/31/2009 FMV of the receiving traditional IRA when calculating the RMD for 2010. Failure to add the outstanding recharacterization to the FMV will result in the calculated RMD amount being less than what it should be, causing the IRA owner to owe the IRS an excess accumulation penalty of 50% of the RMD shortfall.

Important: The Tax Cuts and Jobs Act of 2017 repealed the option to recharacterize Roth conversions, for Roth conversions done after 2017.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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