Everybody at any income level can make contributions to a traditional IRA (tIRA). However, you can only deduct your contribution if your Modified AGI (MAGI) is below some threshold. Similarly, for Roth IRAs, you cannot contribute to a Roth IRA if your MAGI exceeds a certain threshold. Because you can wait until the tax filing deadline (excluding extensions)[1] (generally April 15th following the tax year in question) to contribute to your IRA, some people will wait until the beginning of tax filing season to be sure about their income and tIRA deduction or Roth IRA contribution eligibility. However, this is not necessary because of something known as recharacterization (note: the 2017 Tax Cuts and Jobs Act removed the ability to recharacterize conversions but not contributions. Do not get this confused).

Recharacterizing does involve a couple extra steps, so you may ultimately decide that it's not worth the trouble (though in reality it just requires one phone call and one attachment on your tax return). Which is fine - it's called personal finance for a reason.

What is a Recharacterization?

From IRS Publication 590-A

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.

If you recharacterize a traditional IRA contribution to a Roth IRA contribution, it is as if you originally contributed to the Roth IRA in the first place (and vice versa).

How Do You Recharacterize an IRA Contribution?

The IRS will tell you a lot of things need to happen. Again from 590-A

To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information.

  • The type and amount of the contribution to the first IRA that is to be recharacterized.
  • The date on which the contribution was made to the first IRA and the year for which it was made.
  • A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA.
  • The name of the trustee of the first IRA and the name of the trustee of the second IRA.
  • Any additional information needed to make the transfer.

However, in practice the process is far less involved. When I recharacterized my IRA contribution I simply called Vanguard and told them I wished to recharacterize $X of my contribution, and they took care of everything, including calculating the applicable losses or gains.

How Do I Report a Recharacterization?

IRS Publication 590-A redirects us to Form 8606 and its instructions. (Note: for these instructions the tax year in question is 2018)

You made a contribution to a traditional IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a Roth IRA. If you recharacterized only part of the contribution, report the nondeductible traditional IRA portion of the remaining contribution, if any, on Form 8606, Part I. If you recharacterized the entire contribution, don’t report the contribution on Form 8606. In either case, attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2018, include the amount transferred from the traditional IRA on Form 1040, line 4a; or Form 1040NR, line 17a. If the recharacterization occurred in 2019, report the amount transferred only in the attached statement, and not on your 2018 or 2019 tax return.

Note that so long there is no non deductible portion remaining of your tIRA contribution (and in most cases, there won't be) there is no need to fill out Form 8606; you just need to attach an extra statement explaining the recharacterization.

Example. You are single, covered by an employer retirement plan, and you contributed $4,000 to a new traditional IRA on May 27, 2018. On February 24, 2019, you determine that your 2018 modified AGI will limit your traditional IRA deduction to $1,000. The value of your traditional IRA on that date is $4,400. You decide to recharacterize $3,000 of the traditional IRA contribution as a Roth IRA contribution, and have $3,300 ($3,000 contribution plus $300 related earnings) transferred from your traditional IRA to a Roth IRA in a trustee-to-trustee transfer. You deduct the $1,000 traditional IRA contribution on Form 1040. You don’t file Form 8606. You attach a statement to your return explaining the recharacterization. The statement indicates that you contributed $4,000 to a traditional IRA on May 27, 2018; recharacterized $3,000 of that contribution on February 24, 2018, by transferring $3,000 plus $300 of related earnings from your traditional IRA to a Roth IRA in a trustee-to-trustee transfer; and deducted the remaining traditional IRA contribution of $1,000 on Form 1040. You don’t report the $3,300 distribution from your traditional IRA on your 2018 Form 1040 because the distribution occurred in 2019. You don’t report the distribution on your 2019 Form 1040 because the recharacterization related to 2018 and was explained in an attachment to your 2018 return.

And for contributions originally made to a Roth IRA:

You made a contribution to a Roth IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a traditional IRA. Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2018, include the amount transferred from the Roth IRA on Form 1040, line 4a; or Form 1040NR, line 17a. If the recharacterization occurred in 2019, report the amount transferred only in the attached statement, and not on your 2018 or 2019 tax return.

Note that you only need to file Form 8606 in this situation if your newly recharacterized tIRA contribution was non-deductible.

Example. You are single, covered by an employer retirement plan, and you contributed $4,000 to a new Roth IRA on June 16, 2018. On December 29, 2018, you determine that your 2018 modified AGI will allow a full traditional IRA deduction. You decide to recharacterize the Roth IRA contribution as a traditional IRA contribution and have $4,200, the balance in the Roth IRA account ($4,000 contribution plus $200 related earnings), transferred from your Roth IRA to a traditional IRA in a trustee-to-trustee transfer. You deduct the $4,000 traditional IRA contribution on Form 1040. You don’t file Form 8606. You attach a statement to your return explaining the recharacterization. The statement indicates that you contributed $4,000 to a new Roth IRA on June 16, 2018; recharacterized that contribution on December 29, 2018, by transferring $4,200, the balance in the Roth IRA, to a traditional IRA in a trustee-to-trustee transfer; and deducted the traditional IRA contribution of $4,000 on Form 1040. You include the $4,200 distribution from your Roth IRA on your 2018 Form 1040, line 4a.

When is the Deadline to Recharacterize?

Even though the deadline for your contribution, as mentioned earlier, is the tax filing deadline without extensions, you are allowed to recharacterize a contribution up to the extended deadline (which in general is October 15)

Timing.
The election to recharacterize and the transfer must both take place on or before the due date (including extensions) for filing your tax return for the tax year for which the contribution was made to the first IRA.
Extension.
Ordinarily, you must choose to recharacterize a contribution by the due date of the return or the due date plus extensions. However, if you miss this deadline, you can still recharacterize a contribution if:

  • Your return was timely filed for the year the choice should have been made, and
  • You take appropriate corrective action within 6 months from the due date of your return excluding extensions. For returns due April 15, 2019, this period ends on October 15, 2019. When the date for doing any act for tax purposes falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

Even if you did not file for an extension, you can still recharacterize your IRA contribution up to the extended deadline.

So How Does This Help Me?

If your income is close to the threshold for deducting tIRA contributions, or close to the threshold for making direct Roth IRA contributions (and you intend to do the Roth backdoor), then you don't need to wait until tax filing season to make your contribution. This way you won't lose out on a year's worth of market movements in your IRA.

This only requires you to attach to your tax return a simple statement that explains the amount you transferred from your Roth/Traditional IRA to your Traditional/Roth IRA.


  1. IRS ↩︎