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Roth IRA Recharacterization – What Your CPA Doesn’t Know

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

Even if you consult your financial advisor or CPA, she might not have all the answers when it comes to a Roth IRA re-characterization. That’s understandable. The world of IRA restrictions is vast. But if you have a clear understanding of this issue, you might be able to make some extremely helpful financial moves.

What is a Roth IRA Re-characterization and How is it Useful?

Most people consider a Roth IRA re-characterization when the market drops significantly after the initial conversion. That could make a lot of sense and here’s why. Let’s say you converted your IRA when it was worth $100,000. For our purposes, let’s say you paid the tax on the conversion with money outside the IRA so the entire $100,000 was rolled into the Roth. But because the market dropped significantly, your Roth is now only worth $70,000. That stinks because you paid the tax on the $100,000 but only have $70,000.

You can re-characterize the conversion, put the Roth money back into a regular IRA and recoup the tax you paid. If you do this, it’s as if you never converted the IRA to a Roth. Think “do over”.

What Your CPA May Not Know

CPA’s are sometimes confused and think that this person would have to put the full $100,000 back into the IRA in order to recoup the taxes paid but that’s not true. The full value of the $100,000 conversion is now $70,000. As long as you re-characterize the full value, you won’t have to pay the IRA Roth conversion tax on the initial $100,000.

Now, even though this is the primary reason people reverse the Roth conversion, you can re-characterize for any reason you want. Also, you are allowed to re-characterize only part of your Roth if you so desire. It’s not an all or nothing proposition.

You have a very long period of time to consider the re-characterization. In fact, you have until October 15 of the year after you make the conversion to get it done generally speaking. If the 15th falls on a weekend, you usually have a few extra days to complete this process.

Once you decide you want to re-characterize your Roth conversion, you have to be very careful. Don’t take the money out of the Roth and deposit it into the IRA. Do a direct transfer from the Roth to the traditional IRA custodian. The nice thing is you can do this even if the original money came out of a company plan. And you can re-characterize the money to any IRA – not only the one you took the money out of in the first place.

Even if you’ve already filed your tax return you can still move ahead with the re-characterization. All you have to do is amend your tax return.

Did you ever consider a Roth IRA re-characterization? What was most confusing to you? Have you exposed any other myths about Roth IRA conversions?

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Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

YouTube Video UCoU0buhwVplzXrsyf342nOg

Retirement Crusaders

June 10, 2022 12:19 PM

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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

YouTube Video UCoU0buhwVplzXrsyf342nOg

Retirement Crusaders

June 10, 2022 12:19 PM

Subscribe
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