Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
For IRA contributors who have changed their mind about what type of contribution is best, the IRS offers an amazingly generous provision that allows you to essentially "do-over" your contribution.
Joining me to discuss the specifics of this strategy is retirement expert and author Ed Slott. Ed, thank you so much for joining us.
Ed Slott: Great to be here. Thanks.
Benz: I'd like to cover this topic of recharacterization, the do-over. So if you inadvertently fund the wrong type of IRA and decide that you want to switch to, say, Roth from traditional after listening to you talk about the virtues of Roths, what are the steps that you need to take to do that?
Slott: Well, you would undo it. You would call your custodian. And this works even with a conversion. You have until Oct. 15 of the year after the tax year you converted.
For example, let's say now it's 2012. Let's say you converted in 2011 a large amount, maybe a few hundred thousand even, and now it comes time to pay the piper, and for some reason you can't pay it, or the account didn't do as well, you actually have until Oct. 15, 2012, the end of this year, to reverse or recharacterize or undo your Roth conversion. And all that happens is, you notify the custodian--by custodian I mean the bank, broker, you talk to your financial advisor, wherever your IRA money is--and say put some or all of it back. And you better hope you have a good advisor or somebody there that can make that calculation for you, because it comes with its share of income or loss, and it goes back to the IRA with a conversion, as if it never happened. That's the big recharacterization.
But you can do smaller recharacterizations on contributions. Let's say you're listening to this and you already did an IRA contribution to a traditional IRA, and maybe I convinced you to do a Roth IRA, because long-term I think it might be more beneficial to have your money grow tax-free. You could still recharacterize it as a Roth IRA. Same way: Just notify ... if you have a financial advisor that probably would be better, or the institution. Just be careful. Remember, you don't have to do that by tax time, so be careful that you're talking to somebody [who is knowledgable about recharacterizations]. With these big institutions, you have to know that they know what they're talking about. It's not every person that answers the phone is a retirement expert as they'd have you to believe.
Benz: So you can also do partial re-characterizations as well; it doesn't have to be the whole kitty?
Slott: Yes. But this is something I would look at with a financial advisor or CPA or somebody to guide you, because it can get a little complicated, and you don't want to make a mistake here.
Benz: Well, Ed, thank you so much for sharing your insights. It's always great to hear from an expert like you on such an important topic, and there are obviously lots of complexities. So thanks for joining us.
Slott: Thanks, Christine.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.