Still Time to Undo a Roth Conversion
Is it true that I can still undo a Roth conversion that I made last year and get back the money I paid in taxes?
Yes, it is. You have until October 15, 2009, to undo a Roth conversion you made anytime in 2008. So if you converted a traditional IRA to a Roth last year -- and, because of market losses, the account is now worth less than the amount you paid taxes on -- you can undo the conversion, file an amended tax return (Form 1040X), and get back the taxes you paid on the conversion. Wait 30 days, and you can reconvert to a Roth, paying tax next April on the reduced amount in the account at the time of the second conversion.
For example, say you converted a $100,000 traditional IRA to a Roth in 2008. If none of your contributions to the IRA were nondeductible, then you had to pay taxes on the full $100,000 conversion.
But say that your Roth took such a beating in the meltdown that it now holds just $75,000, even after the market recovery in recent months. You can undo the conversion and reclaim the taxes you paid on that $100,000. If you later reconvert the $75,000, the tax bill will be based on the lower amount. If you are in the 25% bracket, the conversion do-over would save you $6,250.
Undoing the Roth conversion might make sense even if your account has not fallen in value. Say you’re in a different financial situation than you were when you made the switch, and you could really use the money you paid in taxes -- for example, you’ve lost your job since then and are struggling with mounting debt. You could undo the conversion, get back the money you paid in taxes, and then reconvert the traditional IRA to a Roth later, when it’s easier to afford the tax bill. If you wait until 2010 to reconvert the traditional IRA to a Roth, you’ll be able to spread the tax bill over your 2011 and 2012 tax returns. See The New Roth Rollover Rules Explained for more information.
To undo a Roth conversion, contact the IRA administrator and ask to recharacterize the Roth back to a traditional IRA. The administrator must make a direct transfer from the Roth to the traditional IRA, without sending the money to you. Many administrators have recharacterization request forms available on their Web sites. You’ll also need to file an amended return on Form 1040X for 2008 to get back the money you paid in taxes on the original conversion, and file Form 8606 to report the recharacterization. See the Instructions for Form 8606 and IRS Publication 590 for details.
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