Deadline Approaching for Undoing a 2013 Roth IRA Conversion
October 1, 2014 | By Kevin Smith
If you converted a traditional IRA to a Roth IRA in 2013 and your Roth IRA has sustained losses, you may want to consider whether it makes sense to undo (recharacterize) your conversion. You have until October 15, 2014, to undo your 2013 conversion. (If you’ve already filed your federal income tax return for 2013, you need to file an amended return by the tax filing deadline if you recharacterize.) A recharacterization can help you avoid paying income tax on IRA assets that have lost value since the conversion. When you recharacterize, your conversion is treated for tax purposes as if it never happened.
For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2013. Further assume that your Roth IRA is now worth only $60,000. If you don’t undo the conversion you’ll pay federal (and possibly state) income tax on $100,000, even though the current value of those assets is only $60,000. If you recharacterize, your IRA administrator will make a direct transfer of the assets from your Roth IRA back to your traditional IRA. For tax purposes, you’ll be treated as though the conversion never happened, and you’ll wind up with no resulting tax bill (or a tax refund if you already filed and paid taxes on the conversion).
If you recharacterize your 2013 conversion, you’re allowed to convert those dollars (and any earnings) to a Roth IRA again (“reconvert”) but you must wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. Keep in mind that even though the amount you recharacterized (and any earnings) is subject to a 30-day waiting period, any additional amounts in your traditional IRAs are not subject to the waiting period, and you can convert all or part of those dollars to a Roth IRA at any time. If you reconvert in 2014, then all taxes due as a result of the conversion will be included on your 2014 federal income tax return.
(You can also recharacterize a 2014 Roth conversion. However, the deadline for doing so isn’t until October 15, 2015.)
Whether it makes sense to recharacterize your Roth conversion depends on several factors, including the extent of the losses in your Roth IRA and your expectations of where the markets may be headed.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014.
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