IRA Contribution Recharacterization Rules

What is a Recharacterization of an IRA?

You can change the status of an IRA contribution from one type to another, such as from a Roth IRA to a traditional IRA. This is called a recharacterization.

Why Would I Want to Make a Recharacterization?

Think of recharacterization of an IRA in terms of reclassifying or “fixing” a contribution. IRA recharacterization rules permit you to recharacterize a contribution for any reason, but some of the most common reasons for recharacterizing include:

• Exceeding the annual income limits and contributing too much to a Roth IRA, in which case you would recharacterize the contribution from a Roth contribution to a traditional IRA contribution
• Realizing you’re eligible to contribute to a Roth IRA and decide to transfer the contributions from a traditional IRA to a Roth IRA so you can take advantage of the Roth IRA’s tax benefit when you make withdrawals
• Finding that because you already have a retirement plan through your employer and because of your income, your traditional IRA contributions are not tax deductible. In that case, you may decide to switch them to a Roth IRA for tax purposes, by recharacterizing your traditional IRA contributions to Roth contributions

Recharacterizations must be made for your current tax year and before you have filed your taxes.

How IRA Recharacterizations Work

Recharacterization involves direct transfer of contributions from one type of IRA to another by your IRA custodian. Any earnings you’ve made on the contribution, which are called the net income attributable, or NIA, must also be recharacterized along with the contribution. The NIA is calculated using Worksheet 1-3 from the IRS. Your MissionSquare Retirement plan administrator can help you with the IRA recharacterization calculator to determine the correct NIA.

What are the Rules to Recharacterize an IRA Contribution?

You must have a separate, additional IRA account to recharacterize a contribution from one to another. Depending on whether your multiple IRAs are held by the same custodian or by separate entities, you’ll need to communicate with each custodian about your intention to recharacterize your contribution.

When you recharacterize a contribution from one IRA to another type of IRA, the date of the "second" IRA contribution will show as the date when you made your original contribution to the previous IRA.

You will also be required to report the recharacterization on your federal tax return.

What about a Roth IRA Recharacterization?

If you discover your income is over the Roth IRA income limit, for example, and you wish to avoid a 6% penalty on excess contributions, one option is to recharacterize or reclassify your contribution from a Roth IRA to a traditional IRA. If you don’t have a traditional IRA already set up, MissionSquare can do this for you. You’ll need to include the NIA in the recharacterization, and you’ll need to report the recharacterization on your federal tax return.

Roth IRA Recharacterization Rules from the IRS

A Roth IRA contribution can be partially or wholly recharacterized as a traditional IRA contribution, as long as you recharacterize the contribution by October 15 of the year following the year in which you need to make the adjustment. If your recharacterization is for the 2022 tax year, for example, then you have until October 15, 2023 (with extended filing) to make the recharacterization before filing your taxes.

Moving your assets from a traditional IRA, 401(k), 403(b), or 457(b), into a Roth IRA (called a Roth conversion), does not qualify for recharacterization. Traditional IRA funds transferred to a Roth IRA must be reported as taxable gross income for the year; and such a conversion is irreversible.

What is the Deadline to Recharacterize a Roth IRA Contribution?

The deadline to recharacterize a Roth IRA contribution is the same as the deadline for recharacterizing a traditional IRA contribution. You must recharacterize a Roth IRA contribution before you file your taxes. If you opt for the six-month filing extension, your deadline is October 15 of the year following the year in which you make the adjustment.

How Much Money Can I Recharacterize?

From an IRS standpoint, you may recharacterize all or just a portion of an IRA contribution, as long as you include the NIA in the recharacterization. It’s important to keep in mind, however, any account balance minimums or policies your IRA custodian(s) might have. Be sure to find out about any account limitations before you recharacterize your contributions.

Recharacterization Hypothetical Examples

Example 1

Lucila Avila is a 38-year-old city government worker who contributed $7,000 to her Roth IRA in 2024. When she realizes her combined household income is too high to contribute to a Roth IRA, she decides to recharacterize her $7,000 contribution to a traditional IRA.

She must recharacterize the contribution before she files taxes in 2025. She must also include in the recharacterization any earnings on the Roth contribution. Technically, she has until October 15, 2025 — if she requests an extension from the tax filing deadline of April 15, 2025 — to recharacterize the contribution.

Example 2

Shawn Rutledge is a 50-year-old police officer who contributes to a traditional IRA, thinking he has already maxed out his Roth IRA contributions. He realizes he is still eligible to make Roth contributions and decides to recharacterize some portion of his traditional IRA contribution as a Roth contribution, to leverage Roth IRA tax benefits.

Shawn can recharacterize some or all of his traditional IRA contribution as a Roth contribution as long as the total amount of all IRA contributions does not exceed the annual limit.

IRA Recharacterization Tax Reporting

While recharacterization itself is a nontaxable event, you must report it on your taxes.

Here is more information from the IRS about recharacterization rules.

Need to Recharacterize an IRA Contribution?

Contact MissionSquare Retirement to get started.