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10 Things You Must Know About a Recharacterization

Tuesday, September 01, 2015

By Beverly DeVeny, IRA Technical Expert

October will be here before you know it. I know this because I have already seen Halloween candy in the grocery store and Sarah's blog on the recharacterization's value reminded me. October 15 is the deadline for doing a Roth recharacterization. Here is what you need to know.

  1. A recharacterization must be a direct transfer from the Roth IRA to a traditional IRA. You cannot do a recharacterization as a 60-day rollover.
  2. A recharacterization is not calculated in shares; it is calculated in dollars. You may have converted 100 shares of stock Q, which you now want to recharacterize. But your recharacterization request must be done in the dollar amount of stock Q’s value when you converted the stock.
  3. A recharacterization must include any gain or loss attributable to the amount being recharacterized. This is a simple calculation when the conversion was done to a separate IRA. The current account value already includes any gain or loss on the conversion. When the conversion was done to an existing account then the gain or loss on the entire account must be calculated and the amount attributable to the recharacterization amount must be determined.
  4. The amount that actually goes back to the IRA is the recharacterization amount plus/minus the gain/loss.
  5. Recharacterized funds are treated as though they never left the IRA. Any gains or losses are treated as though they occurred in the IRA. There is no tax on any gain or deduction for any loss that occurred in the Roth IRA.
  6. If the IRA owner is taking RMDs (required minimum distributions), then the total amount recharacterized must be added in to the prior year-end account balance to calculate the RMD for the year.
  7. The deadline to complete the recharacterization is October 15 of the year after the year of the conversion. If you miss this date, you cannot get an extension of time from IRS unless the fault is not yours. An extension is requested through IRS’ private letter ruling process and has an IRS price tag of $4,000.
  8. If a tax return has already been filed, an amended return must be done to get a refund on the taxes paid on the conversion. You have three years to file an amended return.
  9. Partial recharacterizations can be done. You do not have to recharacterize the entire conversion amount.
  10. You can reconvert the assets you have recharacterized, but not right away. You have to wait until the year following the conversion or more than 30 days after the recharacterization, whichever comes later. Essentially, you can only convert the same assets once in a year.