WHAT IS A ROTH RECHARACTERIZATION?

A recharacterization is when an investor changes the way a certain contribution or investment is treated, typically how taxes are applied. Most often recharacterizations happen when there is a change in contribution type from a traditional IRA to a Roth, or from a Roth back to a traditional IRA. Think of it as a “do-over” when you’ve changed your mind.

For many people, reclassifying some or all of their investments from a traditional IRA to a Roth IRA is a smart move if taxes may go up in later years. Paying taxes now at a lower rate can save you money instead higher taxes later. But, if you change your mind after converting, a recharacterization converts  your investment back to the original classification.

Why Would You Want To Recharacterize Your Roth?

There are several reasons that you might want to recharacterize an IRA contribution. You might benefit from a recharacterization if the value of your investments has decreased since you converted your investment from traditional IRA to a Roth. Another reason could be that you’ve simply changed your mind about spending a substantial amount for taxes.

Recharacterizing Your Roth IRA After A Loss

One of the main reasons to recharacterize your Roth back to a traditional IRA is because your investments have experienced significant losses since the conversion. For example, if you have a traditional IRA of $100,000 that you converted into a Roth IRA, you owe taxes on the conversion. You will owe $25,000 in taxes if you’re in the 25% tax bracket..

But if your portfolio lost  substantial value in that year, you would still owe $25,000 in taxes despite the loss in portfolio value. You can recharacterize the Roth back to a traditional IRA and not owe the taxes.

Let Us Help

Our full service registered investment advisory firm is available to help with your Roth recharacterization. For a nominal fee, we can complete the process on your behalf so you don’t miss any of the details