Roth IRA Recharacterization

Monday, June 15, 2009

By Marvin Rotenberg, IRA Technical Expert

Time to get technical…

If you recently converted a traditional IRA to a Roth IRA, you can recharacterize by October 15 of the year following the conversion. A recharacterization means reversing your Roth IRA conversion as if it never happened.

When you convert a traditional IRA to a Roth IRA, you pay the income taxes based on the fair market value of the assets, your basis at the time of conversion. In 2009, if your modified adjusted gross income (MAGI) exceeds $100,000 or you are married and filing separate tax returns you do not qualify for conversion. In 2010 both of these restrictions will be eliminated. If after you convert and then realize at the end of the calendar year your MAGI exceeds $100,000, you can recharacterize.

In addition, if the value of the assets converted have declined in value you also might want to recharacterize. By reversing the transaction you will save the income tax paid on a higher market value. If you already filed your tax return, which included the conversion, you will have to file an amended return on Form 1040 X and perhaps a state amended return.

After a recharacterization, you can convert once again to a Roth IRA. Once you convert and then recharacterize, you can not convert the same funds until the year after the year of conversion or more than 30 days after the recharacterization, whichever is later.

Recharacterization – a great escape hatch.

 

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