You may decide you want to change your traditional IRA contribution to a Roth IRA contribution or vice versa. If you recharacterize your IRA contribution properly and before your tax return due date (including extensions), the tax effect is as though the contribution to the first IRA never happened.
Generally, you instruct the your IRA custodian to transfer the amount to a second IRA.
If you recharacterize your contribution, all these steps are required:
- The transfer amount must include any earnings or losses on the original contribution amount.
- The transfer must be made by the due date of your return (including extensions) for the tax year you made the contribution.
- Report the recharacterization on your tax return for the year during which the contribution was made.
- Use the original date of the contribution (not the date the contribution was recharacterized).
The tax consequences of the contribution are determined by the type of IRA you hold after the recharacterization. Due to the Tax Reform Act, as of 2018, recharacterization of a Roth conversion isn't allowed.