IRS Updates FAQs on Recharacterization of IRA Contributions

By John Iekel • January 31, 2018 • 0 Comments
The IRS has reviewed and updated the information it provides in frequently asked questions (FAQs) concerning recharacterizations of IRA contributions. It did so on Jan. 23.

The FAQs are as follows.

What is a recharacterization of a contribution to a traditional or Roth IRA?

A recharacterization allows a regular contribution made to a Roth IRA or to a traditional IRA to be treated as having been made to the other type of IRA. A regular contribution is the annual contribution that can be made to a traditional or Roth IRA: up to $5,500 for 2018, $6,500 if you’re 50 or older. It does not include a conversion or any other rollover.

How is a recharacterization of a regular IRA contribution accomplished?

To recharacterize a regular IRA contribution, the trustee of the financial institution holding an IRA must be told to transfer the amount of the contribution plus earnings to a different type of IRA (either a Roth or traditional) in a trustee-to-trustee transfer or to a different type of IRA with the same trustee. If this is done by the due date for filing a tax return (including extensions), the contribution can be treated as made to the second IRA for that year (effectively ignoring the contribution to the first IRA).

Can one recharacterize a rollover or conversion to a Roth IRA?

Under the Tax Cuts and Jobs Act (TCJA), effective Jan. 1, 2018, a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The TCJA also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

How does the effective date apply to a Roth IRA conversion made in 2017?

A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by Oct. 15, 2018. A Roth IRA conversion made on or after Jan. 1, 2018, cannot be recharacterized.

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