recharacterization of an inadvertent IRA contribution?`

David_Snowball

A young friend called, seeking advice on a problem that I'm not particularly well-versed in. She just graduated college, received a graduation check and decided to open an investment account at Schwab. (So far, so good.) Somehow she managed to click on the "traditional IRA" button rather than the "brokerage account" button. She would like to undo that mistake.

Any guidance? Her income is de minimis, so I guess withdrawing the deposit would cost her the 10% early withdrawal penalty and virtually nothing in taxes. I've read discussions of recharacterization that keep invoking the terms "complex" and "tax attorney." Hmmm ....

David

yogibearbull

Correcting IRA contribution mistakes are possible by the tax filing deadline. She should call Schwab and follow their instructions. My guess is that her IRA will be zeroed out and the money shifted to brokerage account.
https://www.schwab.com/resource/ira-roth-recharacterization-request-form

msf

Here's the Pub 590A section on withdrawing IRA contributions.
https://www.irs.gov/publications/p590a#en_US_2023_publink1000230703

You can generally make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them. This means that, even if you are under age 59½, the 10% additional tax may not apply. These withdrawals are explained later.
...
In most cases, the net income you must withdraw is determined by the IRA trustee or custodian. [In this case, everything is withdrawn; the excess above the amount contributed is taxable income.]

The Pub goes on to say that it might be permissible to withdraw the contribution up to 6 months after the normal filing deadline.

This withdrawal is different from a withdrawal of excess contributions. An excess contribution is:

the amount contributed to your traditional IRAs for the year that is more than the smaller of:

• $6,500 ($7,500 if you are age 50 or older), or
  
• Your taxable compensation for the year.

https://www.irs.gov/publications/p590a#en_US_2023_publink1000230875

If she doesn't need the money, she could also consider recharacterizing the contribution as a Roth contribution.

Finally, here's a Bogleheads thread that is fairly useful on the subject of withdrawing mistaken contributions.
https://www.bogleheads.org/forum/viewtopic.php?t=212710