Recharacterizing a Roth Conversion

When a traditional IRA is converted into a Roth account, the transaction is treated as a taxable distribution from the traditional IRA, followed by a contribution of the distributed amount to a Roth IRA. Such a conversion triggers an income-tax bill based on the traditional IRA’s value on the conversion date.

If a conversion took place in early 2008, the resulting Roth IRA is now most likely worth considerably less than than it was on the conversion date. However, the tax bill is based on the value of the assets when the conversion took place, which means a tax liability will exist on money that has since been lost.

Thankfully, that ill-advised Roth conversion can be reversed. In fact, recharacterizing the conversion makes it like the conversion never happened, and as a result, that inflated conversion tax bill will also disappear. Conversions can be recharacterized until October 15th of the year following the transaction.

However, converting a traditional IRA to a Roth IRA can still be an appropriate strategy if the timing is right. After recharacterizing, there is a timing restriction as to when the account can be reconverted to a Roth IRA. An investor must wait 30 days after recharacterizing before reconverting.

About the author

Lon Jefferies, CFP®, MBA
Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

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