How to Recharacterize a Traditional IRA
According to Investopedia, recharacterization of an IRA refers to the treatment of a contribution as if it were being made to another type of IRA rather than the IRA the contribution was initially made to. One example of recharacterization is an individual who begins contributing to a traditional IRA but later recharacterizes her contribution by contributing to a Roth IRA.
Other People Are Reading
Instructions
-
-
1
Consider why you want to recharacterize to a traditional IRA. Does recharacterization fall into the time frame you have to do it (during the initial tax filing season, including extensions)? Consider how much tax you will have to pay (if the value declined, you have to pay taxes on the original amount before it declined). Consider all reasons for recharacterization and determine if this is the route you still want to take.
-
2
Move the assets from the current IRA where the contribution was first received to the IRA where you would like the future contributions to be maintained. Ask your IRA trustee about the process, which will be used to make the conversion of funds. Find out if there is any further documentation required for the recharacterization. Provide any necessary documentation to the designated individuals
-
-
3
If a partial recharacterization is being done, calculate the earnings loss by taking subtracting the adjusted opening balance from the adjusted closing balance and taking the net income, which is the contribution amount and multiplying that total by the adjusted opening balance (contribution amount x adjusted closing balance - adjusted opening balance = earnings/loss total). If full recharacterization is being done, skip calculating the earnings loss. File Internal Revenue Service Form 8606 for partial recharacterizations with your taxes (your IRA trustee will file IRS Form 5498 both to you and the IRS). Do not file Form 8606 with your taxes if you are doing a full recharacterization.
-
1
Tips & Warnings
Consult with your IRA trustee and tax adviser to make sure everything has been completed properly.
