Recharacterization vs Redesignating
I rolled $40K out of a larger Vanguard TIRA into a new Vanguard Roth IRA earlier in 2008.
I now want to undo this action, but after careful reading of Ed’s book, I am unsure just what I can/should do.
I assume I can recharacterize by moving the entire contents of the Roth back into the TIRA it came from. I have sold and bought Funds within the Roth this year, so the Funds going back to the TIRA are different from those that originally came out, but I assume this does not matter.
I wonder if I could also redesignate the Roth as a new TIRA? Is there a benefit to this vs the recharacterization? Vanguard says they will leave the Roth sitting there empty for a year if I recharacterize; I wondered if the IRS might be confused if the Roth did not go away completely.
I think the thing that got my thinking confused is that ‘rollover’ and ‘conversion’ were used interchangeably in the book when talking about creating the Roth (at least it seemed that way to me). However, when reversing the action, recharacterization and redesigating were discussed as different types of actions.
Thanks
Permalink Submitted by Alan Spross on Thu, 2008-10-30 21:43
Recharacterizing can be done in various ways as can conversions. Redesignation of an IRA as a different type of IRA is just one way of executing a recharacterization. Other ways are transferring to different IRA account types include a same trustee transfer and a different trustee transfer.
For example, if you choose to convert an entire IRA while keeping the same investments intact, it can be designated as a Roth IRA, and you have a taxable conversion. If you later change your mind or do not meet the income limits to convert, one way to recharacterize is to have the Roth IRA re designated back to a Traditional IRA. Alternatively, this can be done by transferring the funds to a totally different traditional IRA account.
The above options may not be offered with all IRA custodians. Perhaps Vanguard’s operating platform does not conform to redesignation of IRA accounts as a different type of IRA, and they prefer to transfer funds to a different account number altogether to record a conversion and/or recharacterization. These are just different ways to execute the same changes, and there is no difference whatsoever in the tax impact of how the change of IRA accounts is done.
The IRS is not confused by IRA accounts that do not hold any assets.