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February 16, 2009

Recharacterization

Your Guide

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Definition

A recharacterization can be either of the following:

  1. Changing a regular IRA contribution from (a) a Roth IRA contribution to a Traditional IRA contribution or (b) a Traditional IRA contribution to a Roth IRA contribution
  2. Reversing a Roth conversion to a  Traditional, SEP or SIMPLE IRA . ( A recharacterization can occur to a SIMPLE IRA only if the conversion occurred from a SIMPLE IRA). This is important for individuals with conversions that has since lost value. For instance, if the value of the conversion was $100,000, and the assets are now valued at $70,000, the individual will owe taxes on the $100,000 unless it is recharacterized. A recharacterization treats the conversion as if it never occurred, for income tax purposes
  • Tip # 1: An IRA owner who finds that a contribution made to one type of IRA should have been made to another type of IRA- whether for just preference purposes, or for tax and eligibility purposes, can change the ‘flavor’ of the contribution VIA a recharacterization.
    • Tip # 2: An individual may reverse a Roth conversion, through a recharacterization, simply because he/she changed his/her mind and no longer wants the conversion, or because it was determined that the individual was not eligible for the conversion.

A recharacterized conversion or contribution must be accompanied by any net-attributable income(NIA), which means any earnings must be added or any losses subtracted.

Referring Cite

Treas. Reg. 1.408A-5, Q&A 6, TD 9056, Announcement 99-57

Additional Helpful Information

  • A recharacterization must be completed by the IRA owner’s tax filing deadline, including extensions. For an IRA owner who files on a calendar year, this means that if he/she files his/her tax return on  the April 15 tax due date, the recharacterization can be completed by October 15. The deadline of October 15 applies because an individual who files a return or files for an extension by April 15, receives an automatic 6-months extension to complete the recharacterization
  • If an individual timely files his/her return before recharacterizing the conversion/contribution,  and completes the transaction  no later than 6 months after the due date of his/her tax return, he/she should  file an amended return with “Filed pursuant to section 301.9100-2” written at the top.  The amended return should include the transaction and any related earnings for the tax year. An  explanation of the transaction should also be included.

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.

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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