Unconvert A Roth IRA Conversion

August 18th, 2008  |  Published in Retirement  |  5 Comments

Here’s a gem of a recommendation from Kiplinger: If you converted a Traditional IRA to a Roth IRA this year and lost value on your investments, you can undo the conversion and then reconvert to save on taxes.

The process is called “recharacterization.” If you ask the IRA sponsor to recharacterize your conversion and put your money back into a traditional IRA, then you don’t need to report the original conversion to the IRS. Then you can convert the traditional IRA to a Roth later and pay taxes on the smaller balance.

The process is called recharacterization and you have to start it within six months after the due date of your return. So, if you convert it this year (2008), you have six months after April 15th, which is October 15th, to change your mind and undo it. Call up your brokerage and ask them how to recharacterize your Roth IRA back into a Traditional IRA.

Now, there are some gotchas:

  • You will still be subject to the $100,000 rule, which expires in 2010, on this new conversion.
  • You will not be able to convert it back to a Roth IRA immediately. You must wait until the year after the first conversion or 30 days after recharacterizing. So if you converted it last year (2007), you can’t convert until the calendar says 2009.

You can save yourself a lot of money if your investments lost value in the Roth after the conversion!

  

Responses

  1. » Recharacterize & Reconvert a Losing Roth IRA on  Daily Money Hack says:

    August 19th, 2008 at 6:42 am (#)

    […] converted your Traditional IRA to a Roth IRA last year (2007) and your Roth IRA lost value, you can “recharacterize” the conversion back to a Traditional IRA, wait a month, then convert again so that the cost basis of the conversion is […]

  2. LAL says:

    September 5th, 2008 at 9:14 am (#)

    Why would you save on taxes by recharacterizing?

  3. retirehappy says:

    September 6th, 2008 at 4:36 pm (#)

    You save because you would be converting a lower amount since you lost money on the initial conversion amount.

    If you had 10k and converted, you owe taxes on that 10k. If you later you foudn you lose 2k, you recharacterize it, then convert only $8k later on. That way you save on taxes on 2k.

  4. Money Hacks Carnival #29: Food Heaven | LivingAlmostLarge says:

    September 10th, 2008 at 8:08 am (#)

    […] suggests not using a Roth IRA in this market in Unconvert A Roth IRA Conversion posted at My Retirement Blog. I asked the question how do you save on taxes really? Just not paying […]

  5. » >Money Hacks Carnival – The Print Media Edition | Saving to Invest says:

    June 19th, 2010 at 6:25 pm (#)

    […] – FREE Accounting Software for Windows posted at FIRE Finance.- Retirehappy presents Unconvert A Roth IRA Conversion posted at My Retirement […]