Roth IRA Conversion Recharacterization
Rev. 01/19/10; E-mail Alert 2010-1

IRS allows an individual to reverse the conversion from a traditional IRA to Roth IRA by a “recharacterization.”  One of the reasons an individual chooses a recharacterization is when an account value drops soon after the conversion to a Roth IRA. A drastic value drop leaves an individual responsible for taxes on the larger amount converted even though the current value has decreased significantly.  Taxpayers have until the due date of their federal income-tax return (including extensions) for the year the Roth IRA conversion occurs to make a recharacterization. 

• John converts his $250,000 traditional IRA to a Roth IRA in February of 2008
• In February of 2009, his account balance has dropped to $150,000
• John recharacterizes his Roth IRA back into a traditional IRA prior to his 2008 tax filing deadline
• The conversion and recharacterization will have no tax consequences for the 2008 tax year
• John may convert the money to a Roth IRA at a later time and does not have to pay taxes on the $250,000 for 2009.

Note that a recharacterization may only be made when a traditional IRA is converted to a Roth IRA. A recharacterization may not be made when the conversion is from a 401(k) (or any other qualified plan) to a Roth IRA.

For more information, check out our Roth conversion and portability eSeminar by clicking here and to check out parent's, Newkirk Products, Roth IRA conversion products click here.