Recharacterizing Roth Conversion

Recharacterizing roth conversion is discussed on this section of Roth IRAs information website. Recharacterizing roth ira allows the owner of the Roth IRA to convert a traditional IRA to a Roth IRA.

What is a recharacterization of Roth IRA?

After you make a contribution to either a Roth or traditional IRA, you may change the contribution to the other type of IRA. This change is known as a "recharacterization".

There could be any number of reasons for making the change or recharacterization. You could have received information subsequent to your original IRA contribution that makes a recharacterization beneficial or even necessary.

Some reasons for Roth IRA recharacterization are:

You may not qualify for the type of IRA originally contributed to. This could occur for a Roth IRA if you exceeded the income limitations imposed by the IRS on Roth IRA accounts.

You find that you are ineligible to make a deductible contribution to a traditional IRA but qualifies for a Roth contribution.

You mistakenly contribute to a traditional IRA instead of Roth IRAs when you are over 70½.

You want to avoid the tax on a Roth IRA conversion because of a drop in market value after the conversion. See IRS tax Publication 590 Individual Retirement Arrangements for more information.

What is a Roth IRA conversion?

A Roth IRA conversion is when you take the balance or a portion of your Traditional IRA account and convert it into a Roth IRA.

A Roth IRA conversion is reported to the IRS as a distribution from the traditional IRA (not Roth IRA) and is usually a taxable event.

A recharacterized Roth IRA conversion (moving the money back to a Traditional IRA after making a conversion to a Roth) is treated as if the conversion had never occurred for tax purposes.

A recharacterized Roth IRA conversion is treated as actually having been made to the second IRA on the date of the original contribution.

Example:

Suppose a tax payer made a $3,000 contribution to a Roth IRA in January for the current tax year. While doing his tax return next April, the tax payer found that his adjusted gross income was over the limit to be eligible to make a contribution to a Roth IRA. The tax payer should notify the FA in writing to recharacterize the Roth IRA contribution plus earnings to a traditional IRA.