Much of the IRA talk this year has been about converting a traditional account into a Roth now that the $100,000 earnings limit is history.
But as Oct. 15 nears, attention also is being paid to recharacterizing retirement accounts.
You're able to change the new Roth retirement account you converted in the previous tax year back to a traditional IRA by your tax-filing deadline plus extensions. If you filed your tax return on time (by April 15), the IRS automatically gives your six months to recharacterize your IRA.
That makes the recharacterization deadline Oct. 15.
So why would you want an IRA do-over?
In most cases, people who want to recharacterize their retirement account are folks who converted funds from a traditional IRA to a Roth and then watched as their account lost value.
Since they converted tax-deferred money in the traditional account to taxable funds in Roth, they had to pay taxes on the previously higher conversion amount. Now that their retirement fund is worth less, they want those tax payments back.
The advantages are clear in this Kiplinger Ask Kim column example where an account holder converted a $100,000 traditional IRA to a Roth and then watched the account fall to just $80,000:
"If you were in the 25 percent tax bracket before adding the conversion amount to your taxable income, the switch to the Roth cost you more than $25,000 because some of the money would have been pushed into the 28 percent bracket.
Undoing the conversion (a process called recharacterization) retroactively wipes out that tax bill.
This makes sense even if you really want a Roth. If you wait 30 days after the recharacterization, you can reconvert the account. And you'll owe tax only on the shrunken balance — a little more than $80,000 in your case."
If you're in a situation similar to the one detailed above, consider recharacterizing your Roth to a traditional IRA.
But do so soon.
The deadline is just two days away.
In addition to the Kiplinger piece, you can read more about IRA recharacterizations at Investopedia, Fairmark, The Slott Report, Kruse & Crawford and the IRS.
Related posts:
- Are you ready for a Roth?
- Are you ready for a Roth conversion?
- Roth IRAs and your retirement income
- Handy retirement plan rollover chart
- Wisconsin tax tidbit: Roth conversions
- 401(k) Do's and Don'ts
- Get ready to retire
- Getting your rocking chairs on the same porch
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