Tax planning and compliance for investors
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By Kaye A. Thomas
Updated January 24, 2008
Overview of how to undo a Roth IRA mistake by recharacterizing a contribution or conversion.
You might call it the "oops" rule. You can switch your IRA contribution from one type of IRA to another, or undo a conversion. Subject to some restrictions, you can go from Roth to traditional or from traditional to Roth. You can use this rule to recover from a failed conversion, or simply because you changed your mind. You can even use this rule to reduce your taxes by reversing a conversion following stock market losses. Now that's a friendly rule!
About the only unfriendly thing about this rule is the seven-syllable word used to describe it. A better description, in just three syllables: it's a do-over. This rule allows you to change something you did in the past, and treat it as if that's the way you did it in the first place. You switch contribution money or conversion money from one type of IRA to another. If you follow all the rules, it's as if you traveled back in time: you get to pretend the first choice never happened.
Here are some of the possible ways you could use this rule:
Bear in mind that recharacterization isn't the only way to deal with a contribution you didn't want to make. In some cases it makes more sense to move that contribution to another IRA, and in others it might make sense to withdraw the contribution under the excess contribution rules. But recharacterization is the only way you can rewrite the past, and make it as if your contribution originally went to a different IRA.
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