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3 Things You Need to Know About Roth Recharacterizations

1) Recharacterizations of Roth IRA Conversions Always Go Back to a Traditional IRA

Many types of retirement funds can be converted to a Roth IRA. Since the Tax Code technically treats a conversion as a rollover to a Roth IRA, if you can roll the funds to a traditional IRA, you can convert them to a Roth IRA. That means that traditional IRAs, SEP IRAs, SIMPLE IRAs (after 2 years) and, plan permitting, 401(k), 403(b), 457 and other qualified funds can all be converted. But, should you decide that you no longer wish to keep your conversion and want to recharacterize the transaction to get your tax dollars back, regardless of where the money originally came from, the funds will go back to a traditional IRA.

2) A Recharacterization Does Not Have To Be All Or Nothing

This one is pretty self explanatory. If you made a 2010 Roth conversion, but don’t want to keep the whole thing (perhaps you just don’t want to pay all that tax right now), no problem. Under the Code, you can recharacterize all or any portion of your conversion. Keep in mind though, that while this is what’s allowed under the Tax Code, your specific investment could impose further restrictions. For example, you may have an investment strategy that requires a minimum balance, that if split between an IRA and a Roth IRA, would no longer meet that minimum balance per account.

3) There Is The Potential For Relief If You Miss The October 15th Recharacterization Deadline

Roth conversions can generally be recharacterized up until October 15th of the year following the year you convert, whether you are on extension or not. But what happens if you miss the deadline, can IRS provide relief? Thankfully, the answer is yes, but you shouldn’t count on it. If you have a “real” excuse, such as a severe illness, death or natural disaster that legitimately prevented you from recharacterizing your conversion by the October 15th deadline, IRS may very well grant you an extension to do so. On the other hand, if you didn’t know about the deadline, forgot about it or now wish to recharacterize simply because your account dropped in value, IRS is not likely to cut you any slack. Even when IRS does provide relief and grants a PLR, it’s not without significant cost. The “bargain” rate IRS fee for a late Roth recharacterization PLRs is $4,000 (most PLRs are $10,000) - and that doesn’t include professional fees to prepare the ruling which could easily run $5,000 or more.

-By Jeffrey Levine and Jared Trexler


Will the October issue address the compliance requirements associated with a 2010 recharacterization? Specifically form 8606 and any related 1040 footnotes? There is little out there regarding partial, full, etc...thanks

Michael S. Rubin
Managing Director, Director of Client Tax Services
Bessemer Trust
630 Fifth Avenue
New York, NY 10111-0333
[email protected]

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