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October 10, 2012

Five Steps for Recharacterizing Your Conversion or IRA Contribution


By Denise Appleby

October 15[i] is the deadline by which Roth conversions and Traditional/Roth IRA contributions[ii] for last year can be recharacterized. The deadline is usually the tax filing due date, plus extensions, of the Roth IRA owner. However, if you filed your tax return on April 15, you receive an automatic 6-month extension to complete a recharacterization. This 6-month deadline ends October 15 for calendar year tax filers.

Five Steps to Your Recharacterization

Step 1: Check to make sure you still have time. If you filed your tax return or filed for an extension by April 15, you have until October 15. If you did not file your tax return or filed for an extension, your deadline was April 15.

Step 2: Consult with your tax and/or financial professional for assistance with determining if you should recharacterize your conversion or IRA contribution. In some cases, recharacterizations are required, and some are optional. For example:

  • Example of required recharacterization:  You made a contribution to a Roth IRA but your income exceeded the limits allowed for Roth IRA contributions. In this case, you may recharacterize the contribution to a Traditional IRA contribution or remove the amount as a return-of-excess contribution. The deadline for completing a return-of-excess contribution is the same as the deadline that applies to a recharacterization.
  • Example of ‘recommended’ recharacterization: The market value of your Roth conversion has fallen significantly. For example, the market value at the time the conversion was done is $100,000 and the current market value is $60,000. A recharacterization would result in the conversion being treated as if it never occurred for income-tax purposes.
  • Example of ‘recommended’ recharacterization # 2: You made a contribution to your Roth IRA, and your tax advisor has determined that it would make better tax sense to recharacterize the amount to a Traditional IRA and claim the tax deduction[iii].

Step 3: Contact your financial institution/financial representative: Your financial institution should provide you with the forms/documentation they need to process your recharacterization.  If needed, ask your contact to walk you through the process of completing the paperwork. This will help to prevent processing delays.

Step 4: Send in your request before October 15. This will help to ensure that your financial institution is able to process it by October 15. Be sure to follow-up to make sure your request was processed correctly.

Step 5: Notify your tax preparer. Your tax preparer will need to ensure that your tax return properly reflects the recharacterization if necessary.

If you already reported a Roth conversion on your tax return and that conversion is recharacterized, your tax return must be amended to correct that reporting. If less than 100% of your conversion is recharacterized, IRS Form 8606 must be filed to report the recharacterization.

[i] For calendar year tax filers

[ii] An IRA contribution can be recharacterized from a Traditional IRA contribution to a Roth IRA contribution or vice-versa.

[iii] You must meet certain requirements in order to be eligible for a tax deduction for contributions to your Traditional IRA. See the article Active Participant Status–Can You Deduct Your IRA Contribution?



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