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 The change takes place as though it was originally made to the second IRA.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.

  • You exceeded the income limits. You originally planned to meet an income limit for your taxes, but were bumped over the threshold after you made a contribution or conversion to your IRA. This situation commonly arises when receiving a large bonus at the end of the year.
  • You changed your mind about the type of contribution you wanted to make. Maybe you contributed to a traditional IRA, but have since realized that a Roth IRA would be better for your situation.
  • You want to lower your adjusted gross income to be eligible for certain tax credits. This is the situation that we found ourselves in this year.

How to Recharacterize

Steps you need to take:

  • You must inform your trustee to complete a trustee-to-trustee transfer.
  • The transfer must include any net income (or loss) from the original date of the contribution.
  • Report the recharacterization on your taxes (Form 8606).
  • Use the date of the original contribution.

Calculation

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:

  • The year after it was converted.
  • Thirty days after the recharacterization.

For additional information, see IRS Publication 590.

Article featured in: Carnival of Personal Finance #147: Q1 Financial Advice Edition.



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Comments to IRA Recharacterization: What, Why, How and When?

  1. This is an amazingly timely post. I spent a number of hours on Saturday night figuring out that I need to “undo” a Trad-IRA to RothIRA conversion that I did last year because of the income limitation.

    MITBeta @ Don’t Feed the Alligators

  2. @ MITBeta: Sounds like we were doing similar calculations on Saturday! I sent my paperwork in today, it was pretty easy with Vanguard.

    Madison

  3. I’ve got the Vanguard paperwork sitting right here now as well. It will go in tomorrow. Isn’t it amazing how you can do 95% of your taxes in very little time but that last 5% takes hours and hours to get straight?

    Any tips on filling out Form 8606? I haven’t even looked at it yet. When do you get the 1099-P and file 5498? Clearly this won’t get issued in time to make the April 15th deadline… I do not owe, so I don’t have to worry about an extension.

    Thanks for the help!

    MITBeta @ Don’t Feed The Alligators

  4. has date of roth conversion recharacterization been extended due to hurricane irene?

    harvey fallis


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