IRA Recharacterizations are now available in-app and on web
What is an IRA recharacterization?
A recharacterization is when an IRA contribution is transferred from the current IRA to an IRA of a different type.
Common recharacterizations include:
Traditional IRA to Roth IRA
Roth IRA to Traditional IRA
Why would I request a recharacterization?
In some situations, recharacterizations may help you avoid making withdrawals from an IRA if you didn’t meet contribution eligibility requirements.
Examples:
You can recharacterize Roth IRA contributions to a Traditional IRA if you discover that you are above income limits to contribute to a Roth IRA.
If you're not eligible to deduct your Traditional IRA contributions on your income taxes, you can recharacterize Traditional IRA contributions to a Roth IRA.
Tax considerations and reporting
You’ll receive a Form 1099-R that shows the withdrawal from the account that received the original contribution. You’ll also receive two Form 5498s - one for the account that received the original contribution and one for the account that the recharacterized funds were placed into. Because a 5498 may be generated after the tax filing deadline, this form will be sent to the IRS directly by our clearing firm.
Are there any fees?
There are no fees charged when recharacterizing your M1 IRA to another M1 IRA. M1’s IRA termination fee does not apply to recharacterizations.
Request deadline
IRA recharacterizations must be completed by your tax filing deadline, including extensions.
Please submit requests by the end of day on April 1 to allow processing time prior to the tax deadline. Please submit requests by the end of day on October 1 to allow processing time prior to the extended tax deadline.
Prior year IRA recharacterizations can be processed until October 15. However, requesting after the tax deadline may result in needing to file an amended tax return.
Due to the high volume of requests received toward the tax filing deadline, we can’t guarantee that recharacterizations requested after April 1 (tax deadline) or October 1 (extended tax deadline) will be completed.
Recharacterization examples
Recharacterization of contribution plus earnings
Jim, age 42, contributed $4,000 to his Traditional IRA in 2020. Jim’s IRA balance before the contribution was $10,000. To treat the $4,000 as a Roth IRA contribution, Jim must recharacterize the amount to his Roth IRA and include any earnings on the $4,000. The value of Jim’s Traditional IRA when he recharacterizes the $4,000 is $16,500.
Jim has made no additional contributions or distributions. Jim’s Adjusted Closing Balance is $16,500 and his Adjusted Opening Balance is $14,000 ($10,000 + $4,000).
NIA = $4,000 x (($16,500 - $14,000)/$14,000) = $714.29
Jim will recharacterize $4,714.29 ($4,000 in contribution + $714.29 earnings attributable to the contribution).
Recharacterization of contribution minus earnings
Jim, age 42, contributed $4,000 to his Traditional IRA in 2020. Jim’s IRA balance before the contribution was $10,000. To treat the $4,000 as a Roth IRA contribution, Jim must recharacterize the amount to his Roth IRA and subtract any losses on the $4,000. The value of Jim’s Traditional IRA when he recharacterizes the $4,000 is $12,250.
Jim has made no additional contributions or distributions. Jim’s adjusted closing balance is $12,250 and his adjusted opening balance is $14,000 ($10,000 + $4,000).
NIA = $4,000 x (($12,250 - $14,000)/$14,000) = -$500
Jim will remove $3,500 ($4,000 in contribution - $500 loss attributable to the contribution).
M1 is unable to advise if an IRA recharacterization is right for you. Please consult a qualified financial professional with any questions you have about additional tax implications or filing your taxes. We recommend speaking with a qualified financial professional before requesting an IRA recharacterization.
Submitting an IRA recharacterization request
You can submit a current year or prior year recharacterization from your IRA by following these steps:
Login to M1 on your web or mobile browser
Navigate to your Traditional or Roth IRA Account
Tap on 'Funding'
Tap on 'Recharacterize IRA Cash'
Enter the contribution amount you would like to recharacterize
Enter the tax year and Net Income Attributable to your contribution
Review your request and submit
Note: Prior to submitting a recharacterization request, the following is required:
An open M1 Traditional IRA
An open M1 Roth IRA
Cash must be available and settled in your account before it can be recharacterized.
If you recently deposited funds, those funds will take 6 business days before you can recharacterize those funds.
If you recently sold securities to cash, those funds will take 2 business days before you can recharacterize those funds.
Brokerage accounts on the M1 platform are either fully disclosed to APEX Clearing or cleared through M1 Finance LLC. Please look at your account statement to determine how your account is cleared.
M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future performance. Using margin can add to these risks. Users utilizing APEX cleared margin accounts should review the APEX margin account risk disclosure before borrowing. Users utilizing M1 cleared margin accounts should review the M1 margin account risk disclosure before borrowing. M1 Margin Loans are available on margin accounts with at least $2,000 invested per account. Not available for Retirement or Custodial accounts. Margin rates may vary.
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