When it comes to doing something to a Traditional or Roth IRA, recharacterize and convert seem to be two similar concepts but they actually have very different meaning. They both involve change. When you recharacterize, you are changing something. When you convert, you are also changing something. Don’t confuse the two though. If you tell your IRA custodian to recharacterize when you meant convert, you may end up paying tax penalties.
I thought long and hard how to distinguish the two. Here’s what I came up with:
Convert operates on a static balance, a pile of money, if you will. The pile sits in a Traditional IRA. You move it to a Roth IRA. That’s converting. It’s a one-way street. You can’t convert money in a Roth IRA to a Traditional IRA. Because convert operates on a static balance, you can convert whenever you want. The money is always there for you to convert.
Recharacterize operates on an action. You can recharacterize a contribution, which is an action; or you can recharacterize a conversion, which is also an action. Because it operates an action, you have a deadline to affect the action. If you don’t recharacterize before the deadline, the original action becomes permanent.
When you recharacterize, you are saying originally I did X, but on second thought never mind, I want to do Y. If you contributed to Traditional IRA but you had second thought, within a deadline you can recharacterize the contribution as a contribution to a Roth IRA (if you otherwise are eligible to contribute). It also goes the other way: if you contributed to Roth IRA but you had second thought, within a deadline you can recharacterize the contribution as a contribution to a Traditional IRA. If you converted from Traditional to Roth but you had second thought, within a deadline you can recharacterize and undo the conversion.
Say you made non-deductible contribution to a Traditional IRA because your income is too high for contributing to a Roth IRA. If instead of converting from that Traditional IRA to Roth IRA, you said recharacterize, now you are in trouble. Your IRA custodian doesn’t know you aren’t eligible to contribute to Roth to begin with. They will do as you say. Come tax time, your recharacterized contribution will trigger a penalty.
Don’t confuse convert and recharacterize. The letter ‘a’ in recharacterize stands for action. Convert operates on a pile of money; there’s no deadline. Recharacterize operates on an action; it has a deadline.
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serbeer says
Helpful post and nice picture, but what one of them has to do with another?
🙂
Harry says
LOL. I searched for “recharacterize” on Flickr. Understandably nothing came up. I then searched for “convert.” The convertible loosely relates. It says you can drive a convertible to that beautiful mountain when you convert your traditional accounts at zero or low tax rate after you retire.
Girish C says
Regarding your comment “Say you made non-deductible contribution to a Traditional IRA because your income is too high for contributing to a Roth IRA.” I did this in 2014 and then converted the full amount of $5500 from my Traditional IRA to a Roth IRA. As soon as I report the distribution in form 1099R from my financial institution, my tax liability goes up in Turbo Tax. Apparently, I have to do something under Deductions to get Turbo Tax to file form 8606. Any pointers here?
Harry Sit says
See How To Report Backdoor Roth In TurboTax.
Jeff says
Very informative blog. My income came in higher than expected in 2014, and I wound up over the phase-out for Roth. I have yet to withdraw the money from the Roth, is there any opportunity for me to “recharacterize” this 2014 Roth contribution to my traditional IRA as a nondeductible contribution at this late date (12/9/15). Since I am beyond the extended tax return deadline, could I amend my 2014 return showing these recharacterized amounts? Or have I blown the timing completely. Trying to set myself up to take advantage of the Backdoor Roth option.
Harry Sit says
Jeff – The deadline to recharacterize for 2014 contribution already passed. You owe a 6% penalty for the excess contribution for 2014. If you don’t withdraw before 12/31/2015 you will owe a 6% penalty again for 2015 and every year thereafter until you withdraw. See Correcting an Excess Roth IRA Contribution.
Partha says
I made this exact mistake after talking to Fidelity. I contributed to Traditional IRA and then instead of converting to Roth IRA, I recharacterized the contributions to Roth IRA in 2015. Now I understand that the best way to correct this is to recharacterize the full Roth IRA holdings to Traditional IRA, correct? How long after I recharacterize back to Traditional IRA, should I wait before I convert to Roth IRA?
Harry Sit says
Partha – I’m not sure whether or how you can recharacterize the contribution again. Please contact Fidelity about it. There’s no waiting period for converting after recharacterizing. When you recharacterize, it’s as if you contributed to the traditional IRA all along. Sufficient time already passed since then.
Leo says
Hi Harry, I have two questions regarding Recharacterize:
1. If I recharacterized from Roth IRA (contributed in 2014 for tax year 2014) to Non-deductible Traditional IRA in Mar. 2015. Is the tax form 8606 for Tax year 2014 exactly the same as if I contributed to the T-IRA in 2014 for 2014?
2. After the recharacterization (which is $6100, including $600 gain when the fund stayed in Roth IRA), I did a convertion to Roth IRA in 2015. Now I am filing Form 8606 for Tax year 2015. It looks like I have to report $5500 in line 2 as the total T-IRA base, therefore the $600 gain become taxable, even though it is earned when the fund stays in Roth IRA. Is this correct?
3. Is there any time limit between recharacterization and convertion? I.e., Theoretically can I recharacterize the first day, and then convert back to Roth IRA the 2nd day? IRS Pub 590 seems to have a 30 days rule, but I’m not sure if it applies to this case.
Thank you!
Harry Sit says
1) and 2) are both correct. No time limit in your case when you recharacterized a contribution. The 30-day applies when you recharacterize a conversion.
Jay says
Harry, I can’t believe the invaluable community service you provide to lay people like us! Hopefully you can help me out as well.
I have never had a T-IRA acct. I have a Roth with Vanguard for a couple of years now. This is the first year I am doing my own taxes. Dad was doing mine until now.
I am in my first job. I have been contributing to Roth on a monthly basis. Last week while doing my taxes, I learned that I made more money and am not eligible to contribute to Roth for 2017.
Do I tell Vanguard that I need to rechar (??) my 2017 contrib to a non-ded T-IRA and then convert (??) it to a back door Roth? My $5500 was worth appx $6600 on 12/31/17. Am I using the two terms accurately?
Another issue that I have is this: I was hasty to get done with the tax return and had already transmitted my 1040 to IRS showing 0 contribution for Roth AND 0 for T-IRA (once the HRB software told me that I didn’t qualify for IRA contribution). I was thinking that I will call Vanguard and ask them to return/void my Roth contribution for 2017. When I transmitted, I was not even aware of back door Roth or that I could contribute to a non-ded T-IRA for 2017.
I don’t think that I would need to amend the 1040 if I tell Vanguard to rechar (??) the original Roth contrib to a non-ded T-IRA for 2017 and then convert (??) that to back-door Roth. That shouldn’t change my 2017 taxes, correct? Will I need to fill out 8606 and mail it to IRS (if I do the back-door Roth? If yes, what will be the basis for 8606 in that case? Will the balance of addl $1100 go in Roth (after taxes)? Will I pay the taxes on $1100 when I file taxes next year?
I guess I will have to properly account for the conversion early 2019 when I do my 2018 taxes based on 1099-R I will receive early 2019 (and, more importantly, learn from this experience).
I will be immensely grateful to you if you address each of my query. I want to do this right.
Thanks a ton, Harry!
Harry Sit says
You need to recharacterize; otherwise you over contributed to Roth. And redo your tax return in your software by saying you contributed to Roth and then recharacterized. The software will generate the right form and tell you what other statement you will need to attach. After that’s done, you may decide to convert. You will have the difference taxable in 2018 if you decide to do so.
Jay says
Many thanks for your guidance, Harry.
The following is what I understand. Can you please confirm if I am on right track?
1. I need to amend the 1040 by stating that I contributed $5500 to 2017 Roth (although the software says I am ineligible).
2. I should also state that I re-characterized the above Roth to t-IRA (Non Deductible). Should the amount here be 5500 or 6600?
Do I need to mention anywhere in the 2017 tax return that I am also converting from t-IRA to Roth? Or is that something I will do next year?
Thanks!
Harry Sit says
Do the actual recharacterization through Vanguard first. The software will ask you both amounts: the amount you recharacterized ($5,500) and the amount that actually moved. If you decide to convert, it happened in 2018. So you report it next year.
Jay says
Noted with thanks, Harry. I appreciate the gesture.
Pamela says
In a quandary doing TurboTaxes due to part of my 2017 IRA contribution being nondeductible as a result of higher than expected modified AGI. I added $6,500 to a matured IRA in 2017, so this account has several years of deductible contributions plus a mixed (part deductible and part nondeductible) contribution for 2017. Is there anything I can do before 4-18-18 to fix this (move out the nondeductible part to ROTH-heard I can’t do that if the account includes other IRA funds I don’t want to move out). I dread a form 8606 every year for this $3,285 nondeductible contribution.
Lowerider says
UGH! This is the most stressful thing for me. We contributed to my spouse’s traditional IRA ($2000) and now tax time figure out it’s not deductible. I called Vanguard to have the contribution of $2000 recharacterized to his ROTH IRA. The account balance is $2020. (I know the earning of $20 isn’t much but I would like to set the record straight and get the correct answer.)
Vanguard said I have to recharacterize the whole account including earnings/losses, therefore $2020 has to be characterized. Merrill Lynch, which I have done recharacterization with, have always only recharacterize the contribution amount (move over securities and cash to the ROTH IRA to make up the total amount of the contribution). In this case, it would be $2000. What is the correct way? Vanguard is saying Merrill Lynch is incorrect. I am torn!
Harry Sit says
Vanguard is correct, and it’s to your benefit. Now the $20 gets into the Roth account and you won’t have to pay tax on it in the future. I’m guessing Merrill Lynch also did it the same way, and you just misremembered.
Leo says
“Say you made non-deductible contribution to a Traditional IRA because your income is too high for contributing to a Roth IRA. If instead of converting from that Traditional IRA to Roth IRA, you said recharacterize, now you are in trouble.”
So… I’ve just done this and am wondering what the best way to rectify is.
I “recharacterized” in 2017 a non-deductible traditional IRA (contribution in 2016) to a Roth IRA, instead of “converting”.
Only caught this now just days before the 2017 deadline filing date, even though I did received a 1099-R earlier.
I’ve notified my broker to ask them to “recharactierize” that same amount back to my traditional IRA from my Roth IRA.
Wondering if I have now incurred an over-contribution penalty, or if I avoided the penalty by requesting the 2nd recharacterization (undo) before the filing deadline?
Thanks
Harry Sit says
A recharacterized contribution can’t be recharacterized again. You would have to withdraw the excess contribution.
Leo says
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Leo says
Thank you, I appreciate your reply.
I think I’m having a little trouble with the semantics… so instead of asking my brokerage to “recharacterize” my original incorrect recharacterization to my Roth IRA, I would ask them to “withdraw”/transfer it back to my traditional IRA?
I assume then this will trigger another 1099-R that indicates a “Roth IRA distribution”, which would document that I removed the incorrectly recharacterized funds?
Thanks again!
Harry Sit says
Contribute means putting money outside an IRA into an IRA. Convert means moving some money from a traditional IRA to a Roth IRA with no effect to the original contribution. Recharacterize a contribution means changing the original contribution as if you contributed to a different type of IRA to begin with. Withdraw means taking money from inside an IRA to outside the IRA.
After you recharacterized, it’s as if you contributed to the Roth IRA to begin with, except you can’t recharacterize again. See Correcting an Excess Roth IRA Contribution for your options. Again, Option #1 is not available to you.
Heidi says
Hi Harry,
Thank you for explaining these 2! Exactly what I needed.
1 thing I have to ask, “If you CONVERTED from Traditional to Roth but you had second thought, within a deadline you can recharacterize and undo the conversion.” –> I thought undoing the conversion was banned in 2017/2018? I see that this post was created in 2013 so is this something that needs to be updated?
bws92082 says
I know this is an old thread but I don’t know where else to post my question. I would like to plug in some dummy 1099-R data into my tax software to test the impact of various Roth conversion amount scenarios. I don’t want to do a conversion without first knowing what the tax impact will be–I’m on a fixed income so using this year’s software to predict next year’s impact should be close enough.
So is there any source for sample 1099-R forms that actually contain correctly formatted data from which I could use the data as a template to enter the amounts of my choosing? I tried randomly populating the various boxes but the software didn’t make any change to my total tax owed so I must be doing something wrong.
Harry Sit says
For converting from a Traditional IRA to Roth:
Box 1 Gross Distribution = the amount converted to Roth
Box 2a Taxable Amount = the same amount as in Box 1
Box 2b Taxable amount not determined = checked
Box 2b Total distribution = blank (or checked if you converted 100%)
Boxes 3 – 6 = blank
Box 7 Distribution Code = 2 if under 59-1/2; 7 if over 59-1/2
Box 7 IRA/SEP/SIMPLE box = checked
Remaining boxes = blank
Jay V says
Hi- I contributed to a Traditional IRA account with post income tax money for 2022 in 2022 then in 2023 I realized in September 2023 (I filed for extension to file my 2022 return, so its due by Oct 15 2023), that the contribution was non-deductible. I requested Vanguard to recharacterize to Roth.
Will I pay more taxes by doing so, even though I funded the Traditional IRA with after-tax dollars and subsequently recharacterized?
Should I have asked Vanguard to Convert to Roth instead, and would I have avoided higher taxes by doing so? How do I remedy this?
Now when I file my 2023 return through Turbotax, how would I make the entry?
Harry Sit says
Recharacterizing an IRA contribution from Traditional to Roth doesn’t make you pay more taxes but you must be under the income limit for making a Roth IRA contribution. The IRS lists the income limit for 2022 here:
https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022