Recharacterization
Can a Schedule C filer with a SEP IRA recharacterize a Roth IRA contribution into his SEP IRA as a SEP contribution? Pub 590 and 1.408A-5 says that you can’t recharacterize a SEP or SIMPLE IRA contribution to a different plan type and that you can recharacterize a Roth conversion back to a SEP or SIMPLE but it doesn’t address recharacterizing a contribution from a Roth or traditional to a SEP or SIMPLE.
Thanks for any help with this,
Sten
Permalink Submitted by Alan Spross on Mon, 2010-04-05 20:16
No. Recharacterization cannot be used to switch an IRA contribution FROM an employer contribution to an employee contribution as you indicated. The same is true in reverse and for the same reasons, but the second limitation is not publicized as much as the first.
SEP and SIMPLE IRA contributions are salary reduction contributions even if the decision is made by the employee, therefore the tax reporting must be consistent with that. Likewise you cannot turn an employee IRA contribution into a salary reduction contribution by recharacterization. Rollovers or conversions are different because the original qualification to make a contribution is not affected with these transactions.
There is ONE exception. An employee is allowed to make a regular TIRA contribution to a SEP IRA in the same fashion as if it were just a TIRA. Therefore, an employee could recharacterize a Roth IRA contribution to a regular TIRA contribution (but NOT a SEP contribution) to the SEP IRA. For a SEP, the 5498 reporting identifies whether the contribution is a SEP or a non SEP contribution. So of this is the type of recharacterization desired, it can be done. Otherwise, the employee would have to request a return of the Roth contribution, and then any earnings on it become taxable.