What is a re-characterization of a contribution to a traditional or Roth IRA?

A re-characterization allows you to treat a regular contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA. A regular contribution is the annual contribution you’re allowed to make to a traditional or Roth IRA: up to $6,000 for 2019, $7,000 if you’re 50 or older. It does not include a conversion or any other rollover.

How do I re-characterize a regular IRA contribution?

To re-characterize a regular IRA contribution, you tell the trustee of the financial institution holding your IRA to transfer the amount of the contribution plus earnings to a different type of IRA (either a Roth or traditional) in a trustee-to-trustee transfer or to a different type of IRA with the same trustee. If this is done by the due date for filing your tax return (including extensions), you can treat the contribution as made to the second IRA for that year (effectively ignoring the contribution to the first IRA).

Publication 590a Page 30

Can I re-characterize a rollover or conversion to a Roth IRA?

Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be re-characterized. The new law also prohibits re-characterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

How does the effective date apply to a Roth IRA conversion made in 2017?

A Roth IRA conversion made in 2018 may be re-characterized as a contribution to a traditional IRA if the re-characterization is made by October 15, 2019. A Roth IRA conversion made on or after January 1, 2018, cannot be re-characterized. For details, see “Re-characterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions

A recharacterization allows you to change an IRA contribution from one type of IRA to another. The change will be recorded as if the contribution were originally made to the second IRA. Roth conversions made in 2018 or later are not permitted to be recharacterized.

The IRS requires that a recharacterization of a contribution be adjusted for any earnings or losses starting with the original purchase date of the amount being recharacterized. The earnings/loss calculation performed by the broker is based on the performance of the holdings in the entire IRA in accordance with IRS regulations. If the earnings calculation results in a gain, the principal amount being recharacterized and the associated earnings will be transferred to the receiving IRA. If the calculation results in a loss, the principal amount being recharacterized will be reduced by the negative earnings rate and then transferred to the receiving IRA. For more information about earnings and losses, refer to IRS Publication 590-A.

Important tax information Tax consequences All recharacterizations are reported to the IRS. Brokers will send you and the IRS two forms: • IRS Form 1099-R. This form reports the amount you recharacterized and any income or loss on the investment. Refer to it when filing your income tax return. • IRS Form 5498. This form reports the amount you moved to the receiving IRA. Keep it with your retirement account records.

For more information about recharacterization rules and IRS reporting requirements, refer to IRS Publication 590-A or IRS Form 8606 (available at irs.gov). Tax-filing deadline You can recharacterize a contribution anytime until the federal income tax-filing deadline (including extensions) for that particular tax year. If you’ve already filed your tax return or filed for an extension in a timely manner—without recharacterizing—the IRS will grant you an automatic six-month extension, from the standard April 15 tax deadline to October 15. However, you may need to file an amended tax return.