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Recharacterization

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,

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.

 

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