1. What is an IRA recharacterization?
2. Why would I request a recharacterization?
3. Tax considerations and reporting
6. Recharacterization examples
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.
- 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
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.
Recharacterizations at M1
The following information is required for a recharacterization:
- Delivering account number
- Receiving account number
- Contribution amount
- Net income attributable (NIA) to the contribution amount
- Total recharacterized amount requested
- Contribution year (Same or Prior Year)
If you’d like to recharacterize contributions from same and prior year, please provide the contribution amounts and NIA from the years separately. We cannot combine multiple years in one request.
Securities are not eligible for recharacterization. The contribution amount plus any NIA must be in cash for a recharacterization to be processed. Please ensure to initiate a sell order and have Auto Invest turned off.
Once our team receives the appropriate information, it can take up to four business days to process your request. Trading will be paused on both accounts during the transfer process. Processing times may increase during periods of high volume, including at the end of the calendar year and when tax filing deadlines approach.
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).
Learn more about calculating the net income attributable.
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.
To request a recharacterization please contact us.