Posted byon March 31, 2008
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Have you found yourself in a situation where you need to complete an IRA recharacterization? Here is everything you need to know to understand how to get it done on time and report it on your taxes correctly.
What is a Recharacterization?
After you make a contribution to an IRA, you can later change the contribution to a different type of IRA. The change takes place as though it was originally made to the second IRA. For example, if you contributed to a traditional IRA, you can later recharacterize the contribution to a Roth IRA.
In addition, a recharacterization also includes reversing a prior conversion. For example, if you converted money in a traditional IRA to a Roth IRA you can “unconvert” it back to a traditional IRA.
Why You Might Need a Recharacterization
Here are a few examples of situations where you might find yourself needing to recharacterize your IRA.
How to Recharacterize
Steps you need to take:
Often you will not need to calculate the net income (or loss) of the investment since the original contribution (or conversion). You will only need to specify the dollar value of the original amount. The trustee will calculate the earnings and report the recharacterization to you on a form 1099-R and the amount for the changed IRA on form 5498.
When is the Recharacterization Deadline?
The recharacterization is due the same time as your taxes are due for the prior year, April 15 (or October 15 for an extension). Contact the trustee of your IRA to find out their specific instructions for the recharacterization.
Waiting Period for Conversions
After completing a conversion and subsequent recharacterization, you cannot convert it again until the latter of:
For additional information, see IRS Publication 590.
Article featured in: Carnival of Personal Finance #147: Q1 Financial Advice Edition.