Re-Characterization and income tax
I did a Roth conversion from a Traditional IRA in 2010. The Roth is up 30% in one year but now I want to re-characterize back to a Traditional IRA. Will any taxes be due from the gain?
I did a Roth conversion from a Traditional IRA in 2010. The Roth is up 30% in one year but now I want to re-characterize back to a Traditional IRA. Will any taxes be due from the gain?
Permalink Submitted by Alan Spross on Thu, 2011-04-14 22:27
No taxes now, but you will pay the taxes later.
With a gain of 30% you are taking potential tax free earnings and moving making them taxable in the future. Remember that you can split the 2010 conversion income between 2011 and 2012 and would owe no tax for 2010. Also, if your marginal rate is 25%, having a gain of 30% reduces the effective marginal tax rate on your conversion to 19.2%. You should really re think this recharacterization.
Even if you feel that you will still not be able to come up with the taxes after deferring the income, you could do a partial recharacterization. For example, if you recharacterize 50%, you cut your eventual tax bill in half and still save half of your earnings in the Roth.
Give this some more thought.