ROTH Recharacterizations
Undoing a ROTH Conversion
ROTH IRA conversions that later are found not to meet qualifications and traditional IRA contributions that later are found to not be deductible will need to be recharacterized.
ROTH IRA conversions sometimes run afoul of the $100,000 modified gross income limitation. Until 2010, traditional IRAs cannot be converted in a year in which modified gross income exceeds $100,000. After 2009, the $100,000 limitation will no longer exist, but until then recharacterizations will cure this problem.
Sometimes an IRA owner will want to recharacterize so that a lower IRA balance can be used to convert again, at a lower tax. For example, suppose an IRA owner converted in 2007 using the IRA balance at December 31, 2007. The bear market of 2007-2008 might have decreased the value of the IRA significantly. By recharacterizing and then reconverting for 2008 using the lower December 31, 2008, the lower value will result in a lower conversion tax.
On occasion, an IRA owner may have deducted a traditional IRA contribution only to find out later that the owner was found to be an active participant in qualified plan. Or, perhaps a contribution was made to a ROTH IRA and the owner decides to take the deduction. Or, a contribution was made as a ROTH but the owner later discovered that the adjusted gross income limitation was exceeded and the contribution needs to be recharacterized as a nondeductible IRA. In such cases, a recharacterization will cure the problem.
Technical Rules
IRA owners must contact their financial institution to arrange for movement of the contribution back to the original IRA account so that the change happens on or before the deadline of October 15.
The deadline for a recharacterization is October 15th of the year following the year of the contribution. For example, if the contribution was made on or before April 15, 2009 for the year 2008, the deadline is October 15, 2009. If the deadline is missed, a 6% excess contribution penalty will apply starting with the year for which the contribution was made and will apply every year the recharacterization is delayed.
Any reconversion must wait at least 30 days. For example, suppose an IRA owner recharacterizated a ROTH IRA contribution back to a nondeductible IRA on June 30, 2009. He could not reconvert back to the original ROTH IRA contribution until after July 30, 2009
If an IRA owner dies after the year of contribution but before October 15th of the following year, the executor or executrix may make the recharacterization election on behalf of the deceased.
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