In general, a recharacterization moves money from a traditional IRA to a Roth IRA or vice versa. In particular, it changes the name of a particular contribution from one type of IRA to another. Re-characterizations are tax reportable and can be complicated. Either reversing a contribution to a Roth IRA or converting from a traditional IRA to a Roth IRA to a Roth IRA is referred to by tax professionals as a “recharacterization.”
In a recent article about converting from a Roth IRA to a Roth IRA, we said that a switch from a traditional IRA to a Roth IRA cannot be reversed. This was true in recent years due to an amendment introduced by the Tax Cuts and Jobs Act (TCJA). When you re-characterize your contribution, you’ll receive two Forms 5498, one for the first contribution and a second for the amount that is credited to the other IRA as a characterization. In this case, you can change it to a Roth IRA contribution, for which the income is tax-free.
If you invest your IRA in collectibles, the amount invested is considered paid out in the investment year, and you may have to pay an additional 10% tax on early distributions. See Publication 590-A, articles on individual retirement plans (IRAs) and frequently asked questions about retirement plans about waiving the 60-day rollover requirement. A reclassification allows you to treat a regular contribution to a Roth IRA or to a traditional IRA as if it was made to the other type of IRA. If you file a joint tax return and receive taxable compensation, you and your spouse can both contribute to your own IRAs.
The additional tax is 25% if you receive a distribution from your SIMPLE IRA in the first 2 years of participating in the SIMPLE IRA plan. The IRA participant has the option to convert IRA funds (assets and cash) directly or indirectly into the Roth IRA. You can usually carry out the re-characterization online or using standard forms provided by IRA custodian managers. Do not use Form 8606, Non-deductible IRAs, PDF/PDF, Roth Non-deductible IRA contributions to report Roth IRA non-deductible contributions.
The best time to make a Roth IRA conversion is when your income is abnormally low or when a market downturn has significantly affected your traditional IRA. The basic investment vehicle for each of these plans is an IRA, and the investment restrictions apply equally to all types of IRAs. You can transfer your IRA to a qualified retirement plan (such as a 401 (k) plan), provided that the retirement plan has language that allows it to accept this type of extension.