What is a recharacterization?
What is a recharacterization?
A recharacterization is the reversal of an IRA conversion, such as from a Roth IRA back to a traditional IRA, generally to achieve better tax treatment. The strategy of recharacterizing from a Roth back to a traditional IRA was banned by the Tax Cuts and Jobs Act of 2017. 1
What is recharacterization of an IRA?
A recharacterization allows you to treat a regular contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA.
Are Recharacterizations still allowed?
As if life and taxes weren’t confusing enough, even though you can no longer recharacterize a Roth conversion, you are still allowed to recharacterize a contribution to a Roth IRA. If you contributed to a Roth IRA on April 1, 2021, your recharacterization deadline would be October 15, 2022.
Are IRA Recharacterizations still allowed?
The deadline for an individual to recharacterize an IRA regular contribution is his/her tax-filing deadline, including extensions. For individuals who timely filed their 2020 federal income tax return, the deadline to recharacterize an IRA contribution made for tax year 2020 is October 15, 2021.
How do I report recharacterization on my tax return?
If you recharacterized the entire contribution, don’t report the contribution on Form 8606. In either case, attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2020, include the amount transferred from the traditional IRA on Form 1040, 1040-SR, or 1040-NR, line 4a.
Is recharacterization the same as conversion?
When you recharacterize, you are changing something. When you convert, you are also changing something. Don’t confuse the two though. If you tell your IRA custodian to recharacterize when you meant convert, you may end up paying tax penalties.
Do I have to report a recharacterization on my tax return?
Although recharacterizations are nontaxable, they are tax reportable using IRS Forms 1099-R and 5498. The original contribution or conversion must also be reported to the IRS.
What is a recharacterization and how does it work?
A recharacterization lets you move that year’s contribution to a Roth IRA, which offers the ability to take tax-free withdrawals in retirement.* You may have contributed to a Roth IRA, but while preparing your tax return, you realize that either: Your income was too high to qualify for a full Roth contribution.
What is an IRA recharacterization?
An IRA recharacterization treats a contribution made to one type of IRA as having been made to a different type of IRA. A Traditional IRA contribution can be recharacterized to a Roth IRA, or a Roth IRA to a Traditional IRA.
What is a legal recharacterization of a Roth conversion?
It’s effectively a “do-over” which allows you to replace the converted Roth account into an IRA. For tax purposes it’s as if the Roth conversion never happened. There are some rules you must follow to do a legal recharacterization. Failure to follow the rules can lead to the recharacterization being disallowed.
How long do I have to file a recharacterization for 2020?
For example, if you converted in 2019, you would have had until Oct. 15, 2020, to complete a recharacterization. You could also amend and submit a new tax return if you had already filed taxes for the conversion year.
