Here are some of the thing you need to know about “undoing” a previous Roth IRA conversion through a Roth IRA recharacterization.
1. What Is a Recharacterization?
This is process in which you undo a switch you had previously made by moving funds from a Traditional IRA to a Roth IRA (generally via a trustee-to-trustee transfer). This is known as a Roth IRA conversion. A Roth IRA recharacterization is moving those funds back to a Traditional IRA. It’s not an exact undo, however. Everything doesn’t go back to the way it was before, and a variety of restrictions apply. It’s more of a switch from one type of IRA to another.
2. How Much Can I Recharacterize?
You can only recharacterize the same amounts you’ve rolled into a Roth IRA from one/more or more retirement plans by transferring them into a (1) new or (2) existing Traditional IRA. Note that if you took the money from an employer-sponsored retirement plan, you cannot move the funds back into the same retirement plan from which they were distributed.
3. When Can I Recharacterize?
After you have made a rollover from a Traditional IRA into a Roth IRA, you have until until October 15 of the tax year following the conversion to put the money back into a Traditional IRA. (If the 15th falls on a Saturday or Sunday, you have until Monday). If you have converted different amounts from different funds and are seeking to get all or part of those amounts back out of a Roth IRA, each portion of money may be subject to the specified waiting period.
Once you recharacterize a conversion, you cannot re-convert the money back to a Roth until at least 30 days have passed.
4. Do I Have to Have Already Filed Taxes?
Yes, you do—or, you must have officially requested an extension. For instance, the deadline for recharacterizing rollovers done during 2016 and reported on your 2016 tax documents (filed on/before April 18, 2017) is October 15, 2017. [Note: This is not the deadline for filing the amended return, aka Form 1040X, that you will need to claim any credit/refund you’re due because your funds are now in a deductible Traditional IRA.] If you have switched from a Roth IRA to a nondeductible IRA, however, you’ll need Form 8606.
5. If I Filed for an Extension, Does that Move the Dates Out?
It does for the reporting, but not for the act of recharacterization itself. Despite your tax extension, you must have completed the recharacterization of a 2016 rollover by October 15, 2017, for 2016 taxes. The 1040X tax form (for a credit/return) must then be filed by the later of these parameters:
- Three years (including extensions) after the date your original return was due, or
- Within two years after the date you paid the tax.
Because of the various complications, you’ll want to talk to a tax professional. Getting any of these rules wrong could cost you. Note that most custodian representatives are not qualified to provide tax advice.
Finally, remember to calculate both sides before undoing a conversion. If your investments lost value but your tax rate went up, you may not see any benefit to a recharacterization.