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Investing Specialists

4 Good Reasons to Consider a 'Do-Over' for Your IRA

An IRA recharacterization can help remedy a disadvantageous IRA contribution or conversion.

At first blush, "recharacterization" might sound like the worst kind of Internal Revenue Service gobbledygook; as I type it, Microsoft Word doesn't even recognize it as a word. (Notice that I chose the much more user-friendly "do-over" for my headline.) But a recharacterization isn't as complicated as it sounds. Essentially, it's a way to undo an IRA that you might have opened or converted, enabling you to change a Roth IRA back to a traditional IRA or vice versa. Like tax-loss selling, recharacterizing can be a valuable maneuver to help some investors lower their tax bills.

There are a couple of key situations when a recharacterization can make sense, including the following: