Financial Perspectives – Summer 2011

Is a Recharacterization for Me?

Monday, October 17, is a big day – it’s the last day to file income taxes if you received an extension, and the last day to recharacterize your Roth IRA conversion if there is a loss. What does this all mean for you? That depends on your situation, of course, but at a minimum it underscores the need to plan ahead with regard to your IRA strategy.

Generally, a recharacterization occurs if a participant makes a contribution to one IRA for a given tax year and then transfers the contribution (or a portion of the contribution) to another IRA. Why in the world would someone want to do this?

Recharacterizations were created as a means to provide tax relief to IRA participants in several circumstances. A recharacterization might be helpful in a handful of situations, including:

  • If you cannot deduct a traditional IRA contribution, you may want to elect to recharacterize the contribution to a Roth IRA.
  • If your income is above the eligibility limit, it might be necessary to recharacterize a Roth contribution you’ve made to a traditional IRA.
  • You might choose to undo a conversion to a Roth IRA from a traditional, SEP or SIMPLE IRA if the value of that IRA has dropped. In this situation you could potentially reduce a significant tax liability.
  • It may be necessary to recharacterize to correct a prior rollover that was done in error.

Admittedly, the issues and nuances involving recharacterization are confusing. It’s tough to keep abreast of when it’s either necessary or in your best interests. And to add to the challenge, Congress is constantly tweaking the IRA rules in an effort to promote saving. Fortunately, your Raymond James advisor has a host of tools and resources available to help you make smart decisions when it comes to your IRA.

Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are wholly owned subsidiaries of Raymond James Financial, Inc. (NYSE-RJF).

The information contained in this newsletter has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. We may, from time to time, have a position in the securities mentioned and may buy or sell such securities in the course of regular business.