(402) 397-5033 Jeff@omahaadvisors.com

By Sarah Brenner, JD
IRA Analyst

It happens. You have made a 2019 contribution to the wrong type of IRA. All is not lost. That contribution can be recharacterized. While recharacterization of Roth IRA conversions was eliminated by the 2017 Tax Cuts and Jobs Act, recharacterization of IRA contributions is still available and can be helpful in many situations.

Maybe you contributed to a traditional IRA and later discovered the contribution was not deductible. Or maybe you contributed to a Roth IRA, not knowing that your income was above the limits for eligibility. You may recharacterize the nondeductible traditional IRA tax-year contribution to a Roth IRA and have tax-free (instead of tax-deferred) earnings if your income is within the Roth IRA contribution limits for the year. Or, if your Roth IRA contribution is an excess contribution because your income was too high, you may recharacterize that contribution to a traditional IRA because there are no income limits for traditional IRA contributions.

While the much-delayed 2019 tax-filing deadline (July 15, 2020) has now passed, it’s still not too late to recharacterize your 2019 IRA contribution. The deadline for recharacterizing a 2019 tax year contribution is October 15, 2020 for taxpayers who timely file their 2019 federal income tax returns. This is true even if you do not have an extension. You may need to file an amended 2019 federal income tax return if you recharacterized after you have already filed.

If you decide that recharacterization is a good move for you, contact your IRA custodian. You will need to provide the custodian with some information to conduct the transaction, such as the amount you would like to recharacterize and the date of the contribution.  Most IRA custodians can provide you with a form to collect all the necessary information to complete a recharacterization. The IRA custodian will then directly move the funds you choose to recharacterize, along with the earnings or loss attributable, from the first IRA to the second IRA. This is a tax-free transaction but both IRAs report the transactions to you and the IRS. You will receive a 2020 Form 1099-R from the first IRA and a 2020 Form 5498 from the second IRA.

https://www.irahelp.com/slottreport/recharacterization-ira-contributions-still-here