Can you recharacterize an IRA that has already been recharacterized?

[Guest Harding]

Last March I made my 1999 contribution in error to a traditional IRA. I had intended on making the contribution to a Roth IRA. The trustee said no problem. We'll just recharacterize the contribution. Later in the year, I had an unexpected increase in my income that now makes me ineligible to contribute to a Roth IRA in 1999. I can’t recode it to the previous year since I made the maximum contribution in 1998. I wanted to recharacterize it back to the original traditional IRA, but was told I couldn’t do that (though Turbo tax seems to suggest otherwise.) If I take it out as excess, it will cost me about $480 since the fund did really well (10% penalty and taxes on the earnings.)

The other suggestion I’ve received is to carry forward the contributions into a 2000 Roth IRA (costing me 6% tax per form 5329). They then advised me to request a return of excess now since I will in all likelihood not be eligible to make a contribution to a Roth IRA this year either. The 10% penalty and taxes on earning would be $0 since the fund has lost money since January.

My question – can anyone confirm that 1) I can not recharacterize a second time (I can’t find anything in writing to preclude this option), and 2) if I can’t recharacterize again, is the second paragraph my best alternative?

[BPickerCPA]

While the tax law says that a recharacterization cannot be rescinded, the regs suggest that in this situation you can recharacterize back to a traditional IRA since you are not eligible for the Roth.

I suggest you get an extension of time to file so that you can get this properly worked out.

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Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com