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IRA recharacterizations

The IRS has given you the prerogative to change your mind—when it comes to your IRA, that is.

What a recharacterization is

Generally speaking, a "recharacterization" moves money from a Roth IRA to a traditional IRA—or vice versa.

This includes:

  • Changing the designation of a specific contribution from one type of IRA to the other.
  • Undoing all or a portion of a Roth conversion.

Recharacterizations are tax-reportable and could be complicated. We recommend that you review this strategy with a qualified tax advisor to weigh the tax benefits and ensure everything is reported properly.

Why you might want to recharacterize

To change a contribution from a Roth IRA to a traditional IRA

Let's say you already made a Roth IRA contribution for a specific tax year. But while preparing your tax return, you realize that either:

  • Your income was too high to qualify for a full Roth contribution, or
  • You'd benefit more from an immediate tax deduction on a traditional IRA contribution.

With a recharacterization, you can simply change the designation for that year's contribution—in whole or in part—to a traditional IRA.

To change a contribution from a traditional IRA to a Roth IRA

You may have contributed to a traditional IRA because you thought your income was going to be too high to be eligible for a Roth IRA contribution. But your income was lower than you expected, and now you'd prefer to take advantage of the Roth IRA instead.

A recharacterization lets you move the contribution to a Roth IRA, which offers the ability to take tax-free withdrawals in retirement.*

To undo a Roth IRA conversion

Maybe you converted a traditional IRA to a Roth IRA, but now you want to change it back. This might happen because:

  • The taxes owed on the conversion are higher than you're able or willing to pay. Depending on how much you converted and how high your tax bracket is, the taxes on a conversion can be daunting. Perhaps your financial picture has changed, and you need the money you paid in conversion taxes to cover new expenses.
  • Your Roth IRA has declined significantly in value since you converted. A recharacterization back to a traditional IRA may reduce or eliminate the amount you'd owe in Roth conversion taxes. After all, why pay taxes on money you don't have anymore?A
  • You're not certain which will cost you less: current or future taxes. You may have assumed it would be cheaper to pay taxes now on a Roth conversion (when you may be in a lower tax bracket) than to pay taxes later on traditional IRA withdrawals (when you may be in a higher tax bracket). But now you're not so sure.

When you need to complete your recharacterization

The contribution or conversion must be withdrawn on or before your tax-filing deadline for the year in which it was completed, including extensions.

For example, if you file your tax return by April 18, 2017, you can generally request a 6-month extension—this year, until October 16, 2017—to complete your recharacterization. (You may be required to file an amended return at that time.)

How to request a recharacterization

Start by calling us at 800-205-6189—one of our experienced retirement specialists may be able to complete your recharacterization in a single phone call.

If it can't be done over the phone, you'll be instructed to complete and return this form instead:

We're here to help

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