Re-characterization – Splitting Roth IRA

November 14, 2011 – 11:46 am

Many a times, people may be disappointed that they are not getting higher returns after they convert traditional IRA to Roth IRA. In such a scenario, one may go for a re-characterization of their Roth account. Because, a re-characterization may also be followed by reconversion after certain duration, this is a practice used to test waters by many, who want to maximize returns by saving taxes or testing percentage of returns for each plan employed. Most of the time, people who do not want to part with funds that needs to be paid as taxes for conversion may opt for re-characterization. More details on this aspect, can be checked at roth-ira.org.

When one has opted for Roth IRA conversion in January for current year, they can wait until October 15th of the next year, before choosing re-characterization of this account. This is enough time to check plan efficiency after rollover. It is often a good idea to opt re-characterization when one knows that they will qualify for lesser tax bracket in future, once they start withdrawing from traditional IRA. Paying higher percentage of taxes for conversion into Roth type currently can be avoided with this procedure. One may also try to split their account and have multiple Roth IRA so that only a particular account is re-characterized. It is good to opt for re-characterization for accounts that show lower returns.

There is also option to reconvert to Roth IRA, even after one re-characterizes. This can be done after 30 days of re-characterization process. It is better to take professional help when handling re-characterization and reconversion cycle becomes difficult. Splitting traditional IRA into many Roth IRA accounts is a good way to test returns on investments. Tax brackets is the crucial reason for people opting a re-characterization. After retirement, one may fall into lesser tax bracket and this is usually the best time to evaluate conversions and re-characterizations.

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