Recharacterization Definition

What Is Recharacterization?

Recharacterization refers to 2 separate particular person retirement account (IRA) methods:

  1. A contribution to an IRA will be recharacterized as a contribution to a special IRA. This technique is at the moment permissible, and you’ll recharacterize your Roth IRA contribution into a conventional IRA contribution and vice versa, although particular deadlines apply.
  2. A Roth IRA conversion might be recharacterized (or “undone”) into a conventional IRA. Nonetheless, this technique is now not allowed underneath the Tax Cuts and Jobs Act. Immediately, when you do a Roth IRA conversion, it’s a everlasting, irrevocable transfer.

Key Takeaways

  • A person retirement account (IRA) contribution will be recharacterized as a contribution to a special IRA, although particular deadlines apply.
  • Earlier than the Tax Cuts and Jobs Act, you possibly can recharacterize—or “undo”—a Roth IRA conversion again to a conventional IRA.
  • Roth IRA conversions at the moment are irrevocable. As soon as you exchange to a Roth, there’s no turning again.

How Recharacterization Works

A recharacterization permits you to deal with a daily contribution that you just made to a Roth IRA or a conventional IRA as one that you just made to a different sort of IRA. For instance, when you contributed $6,000 to your Roth IRA (the “first” IRA), you possibly can recharacterize it as a $6,000 contribution made to your conventional IRA (the “second” IRA). Notice that $6,000 is the contribution restrict to an IRA for 2022 (rising to $6,500 for 2023).

Recharacterizing a contribution from one sort of IRA to a different offers you the chance to alter your thoughts or appropriate a mistake—say, you contributed to a Roth although your earnings was too excessive.

You have got till the due date in your federal earnings tax return (together with any extensions) for the 12 months if you made the primary contribution to recharacterize your contribution. So long as you recharacterize your contribution by this deadline, you’ll be able to deal with the contribution as made to the second IRA for that 12 months. This implies you can successfully ignore the contribution you made to the primary IRA.

The 12 months if you made the primary contribution is the tax 12 months to which that contribution relates—not essentially the 12 months if you truly made the contribution. Keep in mind that you usually have till April 15 to make a prior-year contribution.

To recharacterize a contribution, ask your IRA custodian (the monetary establishment holding your IRA) to switch the quantity—together with the contribution and associated earnings—to a special sort of IRA. The recharacterization can happen both inside the identical establishment (when you use one custodian for each IRAs) or by way of a trustee-to-trustee switch if completely different suppliers keep the IRAs.

How Do You Recharacterize an Particular person Retirement Account (IRA) Contribution?

To recharacterize a person retirement account (IRA) contribution, you’ll want to make use of an current IRA or open a brand new one to simply accept the withdrawn funds. Subsequent, notify your monetary establishment(s) that you just need to recharacterize a contribution. If the identical IRA supplier maintains each IRAs, you’ll be able to simply notify that one establishment. In any other case, inform the custodian holding the IRA contribution in query and the establishment that can settle for the recharacterized contribution.

You possibly can usually do the recharacterization on-line or together with your IRA custodian’s commonplace type. You will need to report the recharacterization in your tax return for the 12 months if you made the unique contribution utilizing Inner Income Service (IRS) Type 8606.

How Do You Allocate Earnings When Recharacterizing IRA Contributions?

In case you choose to recharacterize an IRA contribution, you need to switch the contribution plus any earnings associated to these funds—or much less any losses. If the IRA consists completely of the contribution and earnings that you just need to recharacterize—for example, it’s a brand new IRA to which you’ve made just one contribution—then you’ll be able to switch the complete IRA. That is known as a full recharacterization.

Conversely, if you wish to switch a part of your IRA, it’s thought of a partial recharacterization. On this case, you need to decide how a lot of the IRA’s earnings are attributable to the contribution that you just need to recharacterize. You possibly can skip the mathematics by asking your IRA supplier to calculate this quantity for you.

How A lot Can I Contribute to an IRA?

For 2022, you’ll be able to contribute as much as $6,000 to your Roth and conventional IRAs. In case you’re age 50 or older, you can also make an extra $1,000 catch-up contribution, bringing the annual contribution restrict to $7,000. For 2023, the restrict will increase to $6,500, or $7,500 when you’re age 50 or older.

Notice that the restrict is the mixed complete for your whole IRAs. So, for instance, when you contribute $4,000 to a conventional IRA, probably the most that you possibly can contribute to a Roth throughout the identical tax 12 months (2022 on this instance) can be $2,000.

Roth IRAs have an additional restriction: Whether or not you are allowed to contribute the total quantity—or something in any respect—is determined by your modified adjusted gross earnings (MAGI) and submitting standing. For instance, when you’re married and file collectively, you’ll be able to’t contribute to a Roth IRA in case your MAGI is $214,000 or extra for the 2022 tax 12 months ($228,000 or extra for 2023).

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