An IRA owner, through recharacterization, can treat a contribution made to one type of individual retirement account (IRA) (i.e., traditional or Roth) as having been made to the other type of IRA. For example, if an individual made a traditional IRA regular contribution, he/she can elect to recharacterize the contribution as a Roth IRA regular contribution, considering he/she is eligible to make a Roth IRA regular contribution.
Deadline to Recharacterize
The deadline for an individual to recharacterize an IRA regular contribution is his/her tax-filing deadline, including extensions. For individuals who timely filed their 2020 federal income tax return, the deadline to recharacterize an IRA contribution made for tax year 2020 is October 15, 2021. Depending on the date of recharacterization, an IRA owner may need to amend his/her federal income tax return. Additionally, recent hurricanes, tropical storms, flooding, and wildfires have resulted in the Internal Revenue Service declaring many areas a federal disaster resulting in tax relief and an even later deadline for affected individuals to recharacterize.
Notification Requirement and Reporting
To recharacterize an IRA contribution an IRA owner notifies the financial organization where he/she made the IRA contribution of his/her intention to move a portion of or the entire original contribution amount, plus net income attributable (NIA), to the other IRA type with the same or a different financial organization. Keep in mind that the original contribution subject to recharacterization, as well as the recharacterization distribution and recharacterization contribution, must be reported to the IRS and IRA owner.
No Recharacterization of Conversions and Qualified Rollovers
Keep in mind that under the Tax Cuts and Jobs Act of 2017, traditional (including simplified employee pension — SEP) IRAs and Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) IRAs that are converted to Roth IRAs are no longer eligible recharacterize back to a traditional IRA or to a SIMPLE IRA. Additionally, rollovers from 401(k), pension, profit sharing, and 403(b) plans to Roth IRAs (i.e., qualified rollovers) are no longer eligible to recharacterize to a traditional IRA.
Due to the various rules and options available for IRA regular contributions, an IRA owner should seek professional tax advice prior to making any contributions. However, even then circumstances may warrant recharacterization of a contribution. Though an IRA custodian/trustee may assist an IRA owner in completing a recharacterization, it is ultimately the IRA owner’s responsibility to determine the tax consequences when making contributions.For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.