Recharacterizing An IRA After Having Second Thoughts


When implementing a financial planning strategy, many individuals make the choice between a traditional IRA and a Roth IRA. Afterward, however, another option is available to change the initial selection of IRA type. Within a prescribed time frame, individuals can recharacterize a contribution made to a traditional IRA or a Roth IRA, effectively reversing the initial selection.

A recharacterization is typically initiated by an IRA owner who develops a change of opinion concerning their chosen IRA type. An IRA contribution can be recharacterized up until October 15 of the year immediately following the year of the contribution. The additional months during which you can recharacterize an IRA allow time to adjust as needed to unforeseen circumstances.

IRA deductibility differences

Even though a Roth IRA has attractive long-term benefits, the initial contribution is made from income already taxed. By the time your total income for the year is known, you may have decided that the up-front tax deferral of a traditional IRA is preferable to that of a Roth IRA. On the other hand, if current income tax deferral is not that important, you might choose to recharacterize a traditional IRA contribution as a Roth IRA contribution.

Tax deduction versus IRA asset value

You may have contributed to a IRA that has subsequently gained or lost value within a few months. If so, your recharacterized contribution for tax purposes differs from the monetary amount transferred between the IRAs. Your contribution amount remains the same, as if it had been placed in the second account on the same day it was actually contributed to the first account. The monetary value transferred between the IRAs, however, must reflect any account earnings or losses.

Recharacterization timeline

The filing of an extension form is not necessary in order to recharacterize an IRA contribution after the filing deadline for the applicable year. If October 15 falls on a weekend or holiday, the recharacterization deadline is extended to the next business day. If you use the same custodian for both accounts, recharacterization may be as straightforward for the custodian as changing the account type designation.

Possible reconversion

Your strategy in IRA planning may change from year to year. An amount moved to an IRA as the result of a recharacterization cannot be transferred to yet another account until after a specified waiting period. A recharacterized amount cannot be reconverted again during the year of recharacterization. Even if reconverted in the next year, there must be at least a 30-day period between the recharacterization and a reconversion.

For more information, contact companies like Family Financial Partners.


14 July 2017

Learning More About Finances

After we bought a house, I started realizing that we were going to need to learn to save a little money. We had become pretty laid back about spending because we were so accustomed to making so much extra each month, but with a mortgage, we found ourselves running out of money on a regular basis. I decided to get real about our finances, which is why I set up a financial plan to stick with year round. You wouldn't believe how much of a difference that simple plan made. We went from scraping together money to head to the grocery store to sticking with a rock solid budget.