Recharacterization Deadline Approaches

It happens. You have made a 2023 contribution to the wrong type of IRA. All is not lost. That contribution can be recharacterized. While recharacterization of Roth IRA conversions was eliminated by the Tax Cuts and Jobs Act, recharacterization of IRA contributions is still available and can be helpful in many situations you may find yourself in.

Maybe you contributed to a traditional IRA and later discovered the contribution was not deductible or maybe you contributed to a Roth IRA, not knowing that your income was above the limits for eligibility. You may recharacterize the nondeductible traditional IRA tax-year contribution to a Roth IRA and have tax-free instead of tax-deferred earnings if your income is within the Roth IRA contribution limits for the year. Or, if your Roth IRA contribution is an excess contribution because your income was too high, you may recharacterize that contribution to a traditional IRA because there are no income limits for traditional IRA contributions.

It’s still not too late to recharacterize your 2023 IRA contribution. The deadline for recharacterizing a 2023 tax year contribution is October 15, 2024 for taxpayers who timely file their 2023 federal income tax returns. This is true even if you do not have an extension. You may need to file an amended 2023 federal income tax return if you recharacterized after you have already filed.

If you decide that recharacterization is a good move for you, contact your IRA custodian. You will need to provide the custodian with some information to conduct the transaction such as the amount you would like to recharacterize and the date of the contribution.  Most IRA custodians can provide you with form to collect all the necessary information to complete a recharacterization. The IRA custodian will then directly move the funds you choose to recharacterize, along with the earnings or loss attributable, from the first IRA to the second IRA. This is a tax-free transaction but both IRAs report the transactions to you and the IRS. You will receive a 2024 Form 1099-R from the first IRA and a 2024 Form 5498 from the second IRA.

By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 09/25/24, with permission. https://irahelp.com/slottreport/recharacterization-deadline-approaches/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 

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