Recharacterization in the context of Individual Retirement Accounts (IRAs) refers to the act of reversing or changing the type of a prior IRA contribution. In simpler terms, it's the process of converting a contribution from one type of IRA to another.
The most common recharacterization occurs between a Traditional IRA and a Roth IRA.
For example, if you made a contribution to a Roth IRA but later decide (within the allowed time period, usually by the tax filing deadline including extensions) that you would rather have made that contribution to a Traditional IRA, you can 'recharacterize' that contribution by transferring the contributed amount (plus or minus any associated earnings or losses) from the Roth IRA to a Traditional IRA.
The same process can be done in reverse, moving contributions from a Traditional IRA to a Roth IRA.
Recharacterizations can be advantageous if a person's tax situation changes and they decide that the tax benefits of one type of IRA are more suited to their needs than the other.
Note that this is distinct from a 'conversion' which is a process of moving money from a Traditional IRA to a Roth IRA, triggering a taxable event because Traditional IRA contributions are tax-deductible and Roth IRA contributions are made with after-tax dollars.
It's important to consult with a tax advisor or financial planner before making decisions about recharacterization to fully understand the tax implications and to ensure that all IRS rules and deadlines are adhered to.
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