What Is Recharacterization?
Let me explain recharacterization for you—it's about two distinct strategies for individual retirement accounts, or IRAs. First, you can recharacterize a contribution to one IRA as if it were made to a different type of IRA. This is still allowed today, so you could switch a Roth IRA contribution to a traditional one or the other way around, but you have to meet certain deadlines.
The second strategy used to let you undo a Roth IRA conversion back to a traditional IRA, but that's no longer possible thanks to the Tax Cuts and Jobs Act. If you convert to a Roth now, it's final—no going back.
Key Takeaways
Here's what you need to remember: You can recharacterize an IRA contribution to treat it as going to a different IRA, with deadlines in play. Before the Tax Cuts and Jobs Act, undoing a Roth conversion was an option, but not anymore. Roth conversions are irrevocable now—once you make the switch, it's permanent.
How Recharacterization Works
Recharacterization means you get to treat a contribution you made to a Roth IRA or traditional IRA as if you put it into the other type instead. For instance, if you put $7,000 into your Roth IRA, you could recharacterize that as a $7,000 contribution to your traditional IRA. Keep in mind, $7,000 is the 2024 limit, while it was $6,500 for 2023.
Be aware, you can't recharacterize employer contributions from SEP or SIMPLE IRAs as going to another IRA. This process lets you fix errors, like contributing to a Roth when your income was over the limit. You have until your federal tax return due date, including extensions, for the year of the original contribution to make this change. Once done by then, it's as if the contribution was always to the second IRA, and you can disregard the first one.
The tax year is based on when the contribution relates to, not when you made it— you can contribute for the prior year up to April 15 usually. To do this, tell your IRA custodian to move the amount, including earnings, to the other IRA type. It can be within the same institution or a trustee-to-trustee transfer if different providers are involved.
How Do You Recharacterize an IRA Contribution?
To recharacterize, you'll need an existing IRA or a new one to receive the funds. Notify your financial institution that you're recharacterizing— if one provider handles both, just tell them; otherwise, inform both the current custodian and the receiving one. You can often handle this online or with their standard form. Report it on your tax return for the original contribution year using IRS Form 8606.
How Do You Allocate Earnings When Recharacterizing?
When recharacterizing, transfer the contribution plus any earnings or minus losses tied to it. If the IRA only has that contribution and its earnings—like a new account with just one deposit—you can move the whole thing in a full recharacterization. For a partial one, figure out the earnings portion attributable to that contribution; your provider can calculate it for you to avoid the hassle.
How Much Can I Contribute to an IRA?
For 2024, the limit is $7,000 across your Roth and traditional IRAs, or $8,000 if you're 50 or older with the catch-up. It was $6,500 or $7,500 for 2023. This is a combined total, so if you put $4,000 in a traditional, you can only add up to $3,000 to a Roth that year. Roths also restrict contributions based on your MAGI and filing status—you might not qualify for the full amount or any at all.
The Bottom Line
There were once two recharacterization methods, but now only one remains: treating a contribution to one IRA as if it went to another, like switching from traditional to Roth or vice versa. Watch the deadlines—you've got until tax day or its extension to act.
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