What Is IRA Recharacterization?
IRA recharacterization is the process of changing a contribution from one type of Individual Retirement Account (IRA) to another. This typically involves switching a contribution made to a Roth IRA to a Traditional IRA, or vice versa. The purpose is to correct or adjust the contribution based on eligibility or changing financial circumstances.
When Recharacterization Applies
Recharacterization is often used when income limits disqualify a taxpayer from contributing to a Roth IRA, or when it becomes more beneficial to treat a contribution as made to a Traditional IRA instead. This option also provides a way to adjust an IRA contribution strategy before the annual tax deadline.
Important IRS Rules
Recharacterizations must be completed by the tax filing deadline. The original contribution amount, along with any investment gains or losses, must be transferred to the new IRA account type.
Please note: Since 2018, recharacterization is no longer permitted for Roth IRA conversions. Once Traditional IRA funds are converted to a Roth IRA, the action is final.
How can I initiate a recharacterization?
IRA recharacterizations are initiated using the IRA Distribution Form (Traditional/Rollover IRA) or the Roth IRA Distribution Form (Roth IRA).