What if a taxpayer makes a failed conversion of a traditional IRA to a Roth IRA (e.g., because MAGI exceeds $100,000 in the year of conversion under the pre-2010 rules), or simply wishes to change the nature of the IRA contribution? This is known at an IRA Recharacterization and be a very effective retirement planning tool under certain circumstances.
Who can recharacterize an IRA?
The Roth IRA rules permit the taxpayer to recharacterize (e.g., to correct a failed conversion that otherwise would result in the excess contribution excise tax) all or any portion of an IRA contribution, including a regular Roth IRA contribution and a qualified rollover contribution. A taxpayer may elect to recharacterize a contribution made to one type of IRA by having it transferred in a trustee-to-trustee transfer to a different type of IRA, or by transferring IRA assets between two IRAs of a single financial institution. The contribution is treated as originally having been made to the transferee plan (and not the transferor plan) on the same date and for the same tax year that the contribution was made to the transferor plan.
What is an IRA Recharacterization transfer?
A recharacterization transfer must include net income attributable to the original contribution, and generally must be made on or before the due date (including extension) of the tax return for the year in which the original IRA contribution was made. However, a taxpayer may be able to make a recharacterization even after the due date for filing returns. The extension is available only if:
1. The taxpayer’s return was timely filed for the year the election to recharacterize should have been made; and
2. The taxpayer takes appropriate corrective action within this six-month period.
The appropriate corrective action consists of the action required for any recharacterization.The taxpayer must notify both the transferor and transferee IRA trustees of the intent to recharacterize the amount, and provide sufficient information for the trustee(s) to effect the recharacterization. The trustee must also make the actual transfer or account redesignation. A recharacterization is not a designated distribution.
If a taxpayer converts an amount from a traditional IRA to a Roth IRA and makes a recharacterization transfer back to a traditional IRA, the taxpayer may subsequently elect to reconvert that amount from the traditional IRA to a Roth IRA, but there are rules that limit how often and when reconversions can be made.
Deadline for recharacterizing a Roth conversion or IRA contribution
The deadline for recharacterizing a Roth conversion or IRA contribution is your tax-filing deadline plus extensions. If you file the tax return on time (generally by April 15), you receive an automatic six-month extension, which means your deadline to recharacterize a 2015 contribution is October 15, 2016.
Converting a traditional IRA to a Roth IRA
Beginning in 2000, an IRA owner who converts a traditional IRA to a Roth IRA during any tax year, and who then makes a recharacterization transfer from the Roth IRA back to the traditional IRA, may not reconvert the traditional IRA to a Roth IRA before the later of:
1. The beginning of the tax year following the tax year in which the original conversion to a Roth IRA was made; or
2. The end of the 30-day period that begins on the day on which the IRA owner makes the recharacterization transfer from the Roth IRA to a traditional IRA (regardless of whether the recharacterization occurs during the tax year in which the traditional IRA was first converted, or the following tax year).
What if I recharacterize a Roth rollover or a conversion that I already reported on my income tax return?
If you have already filed your return, you can file an amended return and subtract the amount recharacterized from the taxable amount of the rollover or conversion reported on your original return. Form 1040X, Amended U.S. Individual Income Tax Return can be used to amend your return. Generally, for a credit or refund, you must file Form 1040X by the later of:
- three years (including extensions) after the date you filed your original return, or
- within two years after the date you paid the tax.