Recharacterization

Recharacterization is the process of changing the tax treatment of a retirement plan contribution. This can be done for a variety of reasons, such as changing from a traditional IRA to a Roth IRA, or from a Roth 401(k) to a traditional 401(k).

There are a few important things to keep in mind when recharacterizing a retirement plan contribution. First, the recharacterization must be done within 60 days of the original contribution. Second, the amount of the recharacterization must be equal to the amount of the original contribution. Third, the recharacterization must be made in the same tax year as the original contribution.

If you meet all of these requirements, the recharacterization will be treated as if you had made the new contribution on the date of the original contribution. This means that you will receive any tax benefits associated with the new contribution, and you will not have to pay any taxes on the earnings from the original contribution.

However, there are also some potential drawbacks to recharacterizing a retirement plan contribution. For example, if you recharacterize a traditional IRA contribution to a Roth IRA, you may have to pay income taxes on the earnings from the traditional IRA. Additionally, if you recharacterize a Roth 401(k) contribution to a traditional 401(k), you may lose the ability to make future Roth 401(k) contributions.

Before you decide to recharacterize a retirement plan contribution, it is important to speak with a financial advisor to understand the potential benefits and drawbacks.

Here are some additional details about recharacterization:

• Recharacterization is not allowed for all types of retirement plans. For example, it is not allowed for SIMPLE IRAs or SEP IRAs.
• Recharacterization can only be done once per year.
• If you recharacterize a contribution, you will not be able to undo the recharacterization later.
• Recharacterization can be a complex process, so it is important to speak with a financial advisor if you are considering it.