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IRA to IRA Roth "Recharacterization" vs "Conversion", is there a difference in result?

Personal Finance & Money Asked on March 11, 2021

Let’s assume this simplified case:

  • At the beginning of 2020, there is no money in my IRA. I contribute the maximum amount allowed (for me 7k$, because I’m old) from after-tax money, and next day convert it to IRA Roth.
  • Later in the year 2020 (and up to 4/15/2021), I consider to ‘change my mind’ and request a recharacterization, which results in my original 7k$ going directly into the IRA Roth, bypassing the IRA. Obviously, the conversion will be ‘deleted’ as now there is nothing left to convert in the IRA.

In both cases the result is that I have 7k$ in the IRA Roth, and pay no taxes:

  • converting after-tax money is either tax-free, or – if I could deduct the contribution partly or fully – an immediate taxable income in the same amount that was deducted, for the conversion. But whichever income or deduction I had, the tax impact ends up being zero.
  • contributing directly to the Roth has no tax impact anyway.

it seems there is little if any difference between the two. Or I am missing something?

[I understand that the direct contribution to IRA Roth has income limits, whereas the detour through the IRA works for anyone. Let’s ignore this limit here.]

Does the answer change if the IRA was not empty, but contained pre-tax money from previous years? I guess yes, because the IRA contribution gets ‘mixed’ with the existing pre-tax money before it gets converted; a recharacterized direct IRA Roth contribution bypasses this mixing?

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