Can I recharacterize after tax contribution from my rollover ira to my roth ira within the same year?

[swimpro005]

I have a rollover IRA from a 401k at my previous employment. This year I ended up contributing $500 after-tax money to it. I've since learned it's not good to contribute and mix into your rollover IRAs so I was wondering if there's anything I can do to reverse this.

I read up about re characterization but it's not clear if I can do it and how to go about it. I kept reading opposing things so I'm not sure. According to The Tax Cuts and Jobs Act, it says I can't. But then I see things like the pro-rata rule and converting. But this is usually done with high earners trying to get around not being able to contribute directly. 

[tagteam]

Please check back later. I will page @dmertz for input.

[dmertz · Accepted solution]

It's not clear whether your after-tax contribution was to the 401(k) or to the IRA.  If it was to the 401(k) and the 401(k) with its after-tax money was entirely rolled over to the rollover IRA, nothing can be done to change that.

If the $500 contribution was instead made to the rollover IRA, what follows applies:

The TCJA made it impermissible to recharacterize Roth conversions and rollovers that have been from a traditional qualified retirement plan like a 401(k) to a Roth IRA.  Regular IRA contributions can still be recharacterized.

"I've since learned it's not good to contribute and mix into your rollover IRAs"

The only reason that one might not want to make contributions to a rollover IRA is that some employer plans might not allow rollovers into the employer plan from an IRA that no longer qualifies as a rollover IRA due to having received regular contributions despite there being no statutory or regulatory limitation against doing so.  It's up to the plan to determine whether they will accept any particular a rollover.  If you are never going to roll money back into an employer plan like a 401(k), there is no benefit to refraining from making a regular contribution into the rollover IRA since for tax purposes all of your traditional IRAs are treated in aggregate as a single account.

Certainly if you are eligible to have made a Roth IRA contribution, a Roth IRA contribution would be more beneficial than a nondeductible traditional IRA contribution and you could recharacterize your $500 traditional IRA contribution to accomplish that.  The deadline to do a recharacterization of a contribution made fore 2023 is October 15, 2024 if by April 15, 2024 you either filed your 2023 tax return or you requested a filing extension.  If you did neither, the deadline to recharacterize was April 15, 2024.

Recharacterizations and Roth conversions are two different things.  What you refer to in regard to high-earners is when a high earner makes a regular Roth IRA contribution, discovers that they are ineligible to have made a regular Roth IRA contribution, recharacterizes that to be a traditional IRA contribution, often nondeductible, then does a Roth conversion which is subject to the pro rata calculation to determine the taxable amount of the Roth conversion.

[swimpro005]

How can I clarify if I made contribution to IRA or 401k?

I had a 401k, left the company and have since rolled it over to a rollover IRA - this was maybe 2-3 years ago.

I haven't touch it since but started to take a more active part in investing this year and contributed $500 from my $7000 contribution limit in 2024 to this rollover IRA. I also have a separate Roth IRA as well.

Would this pertain to the TCJA or would it be classified as a regular IRA?

[dmertz]

OK, you made a regular contribution to the traditional (rollover IRA), so the majority of my post applies.  The changes made by the TCJA do not apply to regular traditional IRA contributions.