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Roth IRA Recharacterization: The Do-Over That Could Make You Rich

By Dan Caplinger - Jan 12, 2014 at 8:43AM

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You rarely get a chance at a do-over, but with Roth IRA recharacterizations, you do. Find out about them here.

Retirement planning involves complex rules, and you rarely get a second chance if you goof up. But in converting a Roth IRA, the opportunity to recharacterize your conversion essentially gives you a do-over opportunity that you can use to boost your total retirement assets.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through Roth IRA recharacterizations and how they work. Dan notes that when you convert an IRA, you can later recharacterize it, essentially undoing the entire conversion. That can be especially lucrative if your investments drop in value, as it prevents you from having to pay taxes on a higher amount. But Dan also goes through strategies that let divide your IRA into two parts, retaining the option to recharacterize either part. In his example, by taking high-flying consumer discretionary stocks General Motors (GM 1.34%) and Best Buy (BBY 2.43%) in one pot and lagging telecoms AT&T (T 0.17%), Windstream (WINMQ), and CenturyLink (LUMN 2.39%) in another, you can choose to keep whichever half outperforms the other while recharacterizing the underperforming portfolio.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
$18.04 (0.17%) $0.03
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
$80.42 (2.43%) $1.91
Windstream Holdings, Inc. Stock Quote
Windstream Holdings, Inc.
General Motors Company Stock Quote
General Motors Company
$38.46 (1.34%) $0.51
Lumen Technologies Stock Quote
Lumen Technologies
$11.15 (2.39%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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