What is the difference between an IRA conversion and an IRA recharacterization?
IRA Conversion
An IRA conversion occurs when you move funds from one type of IRA to another, typically from a Traditional IRA to a Roth IRA. Conversions are generally done to take advantage of potential tax-free growth in a Roth IRA, but the amount converted is usually taxable in the year of the conversion.
IRA Recharacterization
An IRA recharacterization is when you change the type of IRA to which a contribution was made, treating it as though it was originally contributed to the other type of IRA. For example, if you contributed to a Roth IRA but later decide it would be more beneficial to have contributed to a Traditional IRA, you can work with your financial institution to recharacterize the contribution. After recharacterization, it is as if the original contribution was made to the Traditional IRA from the start.
Recharacterizations are relatively uncommon and are often used to correct contributions that may not be eligible for a Roth IRA due to income limits, or to adjust for tax planning purposes.
An IRA conversion occurs when you move funds from one type of IRA to another, typically from a Traditional IRA to a Roth IRA. Conversions are generally done to take advantage of potential tax-free growth in a Roth IRA, but the amount converted is usually taxable in the year of the conversion.
IRA Recharacterization
An IRA recharacterization is when you change the type of IRA to which a contribution was made, treating it as though it was originally contributed to the other type of IRA. For example, if you contributed to a Roth IRA but later decide it would be more beneficial to have contributed to a Traditional IRA, you can work with your financial institution to recharacterize the contribution. After recharacterization, it is as if the original contribution was made to the Traditional IRA from the start.
Recharacterizations are relatively uncommon and are often used to correct contributions that may not be eligible for a Roth IRA due to income limits, or to adjust for tax planning purposes.
