Significance

• A recharacterization is not a rollover. It is a chance to completely undo a Roth IRA contribution or conversion, as though it had never taken place. When you complete the process, your assets will be in a traditional IRA. Regardless of when the recharacterization is complete, the record will show that the funds you transferred to the traditional IRA were contributed the day you initially deposited them in your Roth IRA.
  
  

Notifying IRA Custodians

• To recharacterize a contribution or conversion, you must notify both the custodian to whom you made your Roth IRA contribution and the traditional IRA custodian to whom you want your contribution transferred. You must provide each custodian with the name and address of the other. If you want to transfer Roth IRA funds to a traditional IRA at the same institution, you only need to supply one notification.
  
  

Information for a Recharacterization

• To complete a recharacterization, custodians must know the date when you initially deposited the assets, how much you deposited and the type of deposit you made. You must also make it clear that you need your custodian to transfer both your contribution plus any net losses or gains. This means that if your contribution lost money, you would recharacterize less than you initially deposited. Should your contribution make money, you must transfer those earnings to a traditional IRA.
  
  

Reporting a Recharacterization

• You must report a recharacterization to the IRS by attaching a completed Form 8606 to your tax return. If you file and then realize you want to make a recharacterization, the IRS actually gives you an automatic extension to file an amended return. As long as you initially filed your return on time, you have until your filing deadline plus six months to recharacterize a Roth IRA contribution you applied to the previous year.
  
  

Benefits

• There are a number of situations in which recharacterization could come in handy. If you accidentally contributed more than the Roth IRA contribution limit based on your income and realized your error at the end of the year, you can recharacterize the excess amount. Recharacterization can also help lower your tax bill on amounts you converted from a traditional IRA or employer-sponsored account like a 401k or 457. Imagine that soon after you made the conversion, your assets lost a significant amount of money. Rather than pay conversion taxes on pre-loss levels, you can recharacterize your contribution and convert to a Roth IRA again another time.