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The Short Answer

A Second Chance at IRA Contributions

Here's the skinny on IRA recharacterizations.

Question: My wife and I put money into Roth IRAs last year. But we just completed our tax return last week and found out that we earned too much to make a Roth contribution. What to do?

Answer: Running afoul of the Internal Revenue Service is never an appealing prospect, but you don't have to worry. The tax code includes an amazingly generous provision that lets investors do over their IRAs through a process called recharacterization. So if you opened a Roth IRA and found out that your income was too high for you to qualify for the contribution in the first place, you can recharacterize your contribution as a traditional IRA contribution instead. Individuals who converted traditional IRA assets to Roth can also recharacterize back to traditional IRAs. (More later about other scenarios when a recharacterization can make sense.)