What Is Recharacterization?

Recharacterization Explained in Less Than 4 Minutes

Definition

Recharacterization of an IRA contribution is when you reclassify a traditional or Roth IRA contribution from having been made from one type of account to another.

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Recharacterization of an IRA contribution is when you reclassify a traditional or Roth IRA contribution from having been made from one type of account to another. It’s often used when someone contributes too much to a Roth IRA.

Here’s a closer look at what recharacterization is, how to recharacterize a contribution, and when you may need to use this strategy.

Definition and Examples of Recharacterization

Recharacterization is the process of “fixing” IRA contributions by moving them from one type of IRA to another type of IRA.

For example, say you maxed out your Roth IRA this year. Come tax time, you find out you made too much money to qualify for a full contribution. You don’t want to get penalized by the IRS, so you do a recharacterization to move those excess funds to your traditional IRA.

How Does Recharacterization Work?

Recharacterization is the process of changing the IRS-qualified status of a contribution from one type of IRA to another. For example, you could recharacterize a Roth IRA contribution as a traditional IRA contribution or vice versa.

Some common reasons why you may want to do a recharacterization include:

  • You exceeded the income limits for a Roth IRA and need to “undo” your contributions for the year.
  • You contributed to a traditional IRA, thinking you exceeded the income limits for a Roth IRA but then learned that you do qualify to contribute to a Roth. Now you want to take advantage of the tax benefits of a Roth.
  • You contributed to a traditional IRA,then realize it does not qualify for a tax deduction. So you recharacterize that money to your Roth IRA.

Note

Recharacterization must be done before the tax deadline for the year in which the contribution was made, including any extensions you file. A good rule of thumb is to complete recharacterizations before you file your tax return. Otherwise, you may have to amend your return.

To recharacterize contributions, start by contacting the financial institution that is your IRA provider. Tell them how much money you’d like to recharacterize, and they will move that amount—along with any earnings or losses—over to the other type of IRA.

The entire recharacterization process is done via a trustee-to-trustee transfer, so you don’t need to worry about withdrawing the money yourself. Your IRA provider will handle it all for you. Once your IRA provider completes the recharacterization, you can file your taxes as if you made the original contribution to the second account.

Note

If you're not sure whether or not you should recharacterize a contribution, consider consulting a tax professional.

Recharacterization vs. Conversion

A recharacterization of an IRA is not the same as a conversion, although both strategies move funds from one type of IRA to another.

Here are some of the key differences:

Recharacterization Conversion
Must happen in the same tax year the contribution was made Can be made at any time, even years after the original contribution
Involves transferring funds from one type of IRA to another type of IRA Involves transferring funds from any type of tax-deferred retirement account to a Roth IRA
Example: You over-contribute to your Roth IRA by $1,000 this year, so you move that money to a traditional IRA to avoid IRS penalties. Example: Your financial advisor thinks you have too much money in your tax-deferred retirement accounts. They recommend converting $40,000 of your 401(k) balance into a Roth IRA so you can relieve your future tax burden.

In its simplest form, recharacterizations are for those times when you change your mind about IRA contributions made this year. It’s a way to recategorize them to another type of IRA before you file taxes.

Roth IRA conversions, on the other hand, are for people who want to convert tax-deferred retirement funds into a Roth IRA so they can make tax-free withdrawals in retirement. Conversions can happen at any time. They don’t have to be completed in the same tax year like recharacterizations do.

Note

There’s also no limit to how much you can convert to a Roth IRA. If you wanted to move more than $50,000, for example, it’s possible. You’re not subject to IRA contribution limits.

You used to be able to “undo” Roth IRA conversions through recharacterization if your tax bill was higher than expected. However, this is no longer allowable under the Tax Cuts and Jobs Act.

If you are considering moving funds from one IRA to another, consider speaking with a tax professional about which strategy is right for you.

Key Takeaways

  • Recharacterization is when you “correct” an IRA contribution by transferring it from one type of IRA to another.
  • Recharacterizations are often done when you contribute too much to a Roth IRA and need to move excess funds to a traditional IRA to avoid penalties.
  • Recharacterizations should be completed by the tax deadline, including extensions.
  • You must also recharacterize any earnings made on your contribution.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Retirement Plans FAQs Regarding IRAs.”

  2. IRS. “Instructions for Form 8606 (2021).”

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