What does it mean to recharacterize an IRA?
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
Is IRA recharacterization taxable?
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. When it comes to making your annual contribution to a Traditional or Roth IRA, the execution can seem pretty straightforward.
Can you reverse a distribution from an IRA?
You can only reverse an IRA contribution once in 12 months. Consult your IRA statement or phone the trustee to find the exact amount of the distribution. You must return exactly what you withdrew within the 60-day window to avoid taxation. On the 61st day, taxes — and possibly penalties — are triggered.
How do I report IRA recharacterization on my tax return?
Recharacterizations from a Roth IRA to a traditional IRA—and vice versa—are reported on 2 different tax forms:
- Form 1099-R reports the distribution.
- Form 5498 reports the contribution.
What is the deadline for IRA recharacterization?
October 15, 2021
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.
Are Recharacterizations still allowed?
This has been true for the last few years because of a change instituted by the Tax Cuts and Jobs Act (TCJA). 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.
How does IRA recharacterization work?
Generally speaking, a recharacterization moves money from a traditional IRA to a Roth IRA—or vice versa. More specifically, it changes the designation of a specific contribution from one type of IRA to the other.
What is the difference between IRA conversion and recharacterization?
A recharacterization allows you to undo or reverse your rollover or contribution. With this in mind: Think of IRA conversions as allowing you to transfer funds from a non-Roth IRA account into a Roth IRA account, often with a taxable impact.
How long do I have to replace IRA withdrawal?
60 days
You have 60 days from the time that you take a distribution from your IRA to replace it, either into the same account or into another qualified retirement account.
Can you convert a recharacterization?
You can’t convert and reconvert an amount during the same taxable year, or if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, the conversion will be a failed one.
Is an IRA conversion the same as a recharacterization?
Can You recharacterize a distribution from a traditional IRA?
It is possible to recharacterize an IRA contribution, for example, by moving money contributed/converted to a Roth IRA account into a Traditional IRA account. Is it possible to “recharacterize” a distribution from an IRA of either type?
Do you have to report a recharacterized IRA contribution?
Individuals who elect to recharacterize a 2020 IRA contribution to one kind of IRA (Roth or traditional) as a contribution to another type of IRA must report the recharacterization on their 2020 federal income tax return, as directed by IRS Form 8606.
Can a recharacterized IRA contribution be transferred to a second IRA?
In order to recharacterize an IRA contribution, the contribution must be transferred from the first type of IRA (traditional or Roth) (the IRA to which the original contribution was made) to the second IRA in a direct “trustee-to-trustee” transfer.
What does a recharacterization do to a Roth IRA?
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.