Recharacterization

What Is Recharacterization?

Recharacterization refers to two separate individual retirement account (IRA) strategies:

  1. A contribution to an IRA can be recharacterized as a contribution to a different IRA. This strategy is currently permissible, and you can recharacterize your Roth IRA contribution into a traditional IRA contribution and vice versa, though specific deadlines apply.
  2. A Roth IRA conversion could be recharacterized (or “undone”) into a traditional IRA. However, this strategy is no longer allowed under the Tax Cuts and Jobs Act. Today, if you do a Roth IRA conversion, it’s a permanent, irrevocable move.

Key Takeaways

  • An individual retirement account (IRA) contribution can be recharacterized as a contribution to a different IRA, though specific deadlines apply.
  • Before the Tax Cuts and Jobs Act, you could recharacterize—or “undo”—a Roth IRA conversion back to a traditional IRA.
  • Roth IRA conversions are now irrevocable. Once you convert to a Roth, there’s no turning back.

How Recharacterization Works

A recharacterization lets you treat a regular contribution that you made to a Roth IRA or a traditional IRA as one that you made to another type of IRA. For example, if you contributed $6,000 to your Roth IRA (the “first” IRA), you could recharacterize it as a $6,000 contribution made to your traditional IRA (the “second” IRA).

You can’t recharacterize employer contributions under a simplified employee pension (SEP) IRA or Savings Incentive Match Plan for Employees (SIMPLE) IRA plan as contributions to another IRA.

Recharacterizing a contribution from one type of IRA to another gives you the opportunity to change your mind or correct a mistake—say, you contributed to a Roth even though your income was too high.

You have until the due date for your federal income tax return (including any extensions) for the year when you made the first contribution to recharacterize your contribution. As long as you recharacterize your contribution by this deadline, you can treat the contribution as made to the second IRA for that year. This means that you can effectively ignore the contribution you made to the first IRA.

The year when you made the first contribution is the tax year to which that contribution relates—not necessarily the year when you actually made the contribution. Remember that you generally have until April 15 (April 18 or 19 in 2022) to make a prior-year contribution.

To recharacterize a contribution, ask your IRA custodian (the financial institution holding your IRA) to transfer the amount—including the contribution and related earnings—to a different type of IRA. The recharacterization can occur either within the same institution (if you use one custodian for both IRAs) or via a trustee-to-trustee transfer if different providers maintain the IRAs.

How do you recharacterize an individual retirement account (IRA) contribution?

To recharacterize an individual retirement account (IRA) contribution, you’ll need to use an existing IRA or open a new one to accept the withdrawn funds. Next, notify your financial institution(s) that you want to recharacterize a contribution. If the same IRA provider maintains both IRAs, you can just notify that one institution. Otherwise, inform the custodian holding the IRA contribution in question and the institution that will accept the recharacterized contribution.

You can generally do the recharacterization online or with your IRA custodian’s standard form. You must report the recharacterization on your tax return for the year when you made the original contribution using Internal Revenue Service (IRS) Form 8606.

How do you allocate earnings when recharacterizing IRA contributions?

If you opt to recharacterize an IRA contribution, you have to transfer the contribution plus any earnings related to those funds—or less any losses. If the IRA is composed entirely of the contribution and earnings that you want to recharacterize—for instance, it’s a new IRA to which you’ve made only one contribution—then you can transfer the entire IRA. This is called a full recharacterization.

Conversely, if you want to transfer part of your IRA, it’s considered a partial recharacterization. In this case, you have to determine how much of the IRA’s earnings are attributable to the contribution that you want to recharacterize. You can skip the math by asking your IRA provider to calculate this amount for you.

How much can I contribute to an IRA?

For 2021 and 2022, you can contribute up to $6,000 to your Roth and traditional IRAs. If you’re age 50 or older, you can make an additional $1,000 catch-up contribution, bringing the annual contribution limit to $7,000. Note that the limit is the combined total for all of your IRAs. So, for example, if you contribute $4,000 to a traditional IRA, the most that you could contribute to a Roth during the same tax year would be $2,000.

Roth IRAs have an extra restriction: Whether you're allowed to contribute the full amount—or anything at all—depends on your modified adjusted gross income (MAGI) and filing status. For example, if you’re married and file jointly, you can’t contribute to a Roth IRA if your MAGI is $214,000 or more for the 2022 tax year.

Article Sources
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  1. Internal Revenue Service. “IRA FAQs.”

  2. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

  3. Internal Revenue Service. “IRS Announces Changes to Retirement Plans for 2022.”

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