Recharacterizing an IRA Conversion

If you have recently been through an IRA conversion to a Roth IRA, you may choose to recharacterize your IRA at some point. The process of recharacterizing a converted IRA can seem confusing if you do not take care to learn about the process. Here are the basics of recharacterizing an IRA following its conversion. 

What Is Recharacterization?

Recharacterization occurs after someone has converted a traditional IRA to a Roth IRA. The process of recharacterization will then allow you to convert back from the Roth IRA to the traditional IRA. You could choose to do this for a number of reasons. In many cases, an individual simply changes her mind about wanting a Roth IRA. This process will allow you to convert back without facing any penalties or fines.

Some people might want to recharacterize a contribution to a Roth IRA so that they can take a tax deduction by putting the funds into a traditional IRA.

Deadline

In order to recharacterize an IRA conversion, you will have to make sure that you adhere to the deadlines set forth by the IRS. You should recharacterize your contribution before you file your taxes for the year. This means that the first deadline that you would have to meet is April 15. However, if you get an extension on filing your taxes, you could wait until October 15. As long as you complete the process before one of these dates, you should be able to recharacterize without any problems.

Transfer

In order to recharacterize your IRA contribution, you will have to move your assets from one type of IRA to the other. If you are working with a large financial brokerage that has both types of IRAs, they may simply change the type of account that you have. If you are going with another broker in order to gain access to a different type of IRA, then the brokerages would have to work together in order to transfer the money. If you want to recharacterize, you need to talk to your financial broker in order to get the details about how to accomplish this with your current situation.

Calculations

Before you can recharacterize your contribution, you will have to calculate the profits and losses on that individual contribution. This part of the process can be very confusing, and you might want to get help from a financial professional before going through with it. Here is the basic formula for calculating the value of the contribution that is to be recharacterized.

Start out by taking the adjusted closing balance and subtracting the adjusted opening balance from that number. Take the answer that you get from this calculation and divide it by the adjusted opening balance. Take the number that you get from this calculation and multiply it by the original contribution. This should tell you what the net income from your original contribution was. Performing this calculation is essential if you plan on recharacterizing your IRA contribution.

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