Simplifying IRA Lingo

simplifying IRA Lingo

Conversion, Recharacterization, Reconversion, oh my! IRA terms can get confusing so here are just a few IRA related definitions that are commonly asked about:

ROLLOVER

Assets are withdrawn from a retirement plan and then re-deposited into the same or other eligible plan. This is a reportable transaction for an IRA owner and it must be completed within 60 days. There is a 1 per year limit regardless of how many IRAs you have.

TRUSTEE-TO-TRUSTEE TRANSFER

A transfer of IRA funds that are sent, usually electronically, from an IRA and received directly by another IRA. Unlike a rollover, trustee-to-trustee transfers are unlimited.

CONVERSION

A conversion is when a traditional IRA (or SEP or SIMPLE IRA) is changed into a Roth IRA. Ordinary income taxes will become due on the converted amount in the year of the conversion.

RECHARACTERIZATION

This refers to a traditional IRA that has been converted to a Roth IRA but then the owner decides (s)he wants to “undo” the conversion. Recharacterization is also used to refer to a Roth IRA contribution that an owner wishes to change into a traditional IRA contribution.

RECONVERSION*

Assume an owner converts a traditional IRA to a Roth IRA, then recharacterizes it to “undo” that conversion. However, (s)he later decides that the conversion to a Roth IRA was a good idea after all. The traditional IRA is now going to be reconverted from a traditional IRA to a Roth IRA.

*You cannot convert and reconvert during the same tax year or, if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion.