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Offset Market Losses by Undoing a Roth Conversion

It might be a good time to consider undoing a recent Roth move, given that the value of your investments has probably dropped.

I converted money from my traditional IRA to a Roth IRA last year, but my investments are now worth less than they were when I converted. Is it too late to undo the conversion and get back the money I paid in taxes?

See Also: QUIZ: How Much Do You Really Know About Roth IRAs?

No, it's not too late. And it might be a good time to consider undoing a Roth conversion, given that the value of your investments has dropped since then. (It may also be a good idea to undo a Roth conversion if anything else has changed that could affect the tax bill on your conversion, such as a drop in your tax bracket.)

You have until October 15, 2015, to undo a Roth conversion made in 2014. After you move the money from the Roth back into a traditional IRA (a process called recharacterization), you can file an amended return on Form 1040X and get back the money you paid in taxes on the conversion. Because you're recharacterizing a conversion you made last year, you'll just need to wait at least 30 days after the recharacterization to reconvert any or all of the money to a Roth. Your tax bill on the reconversion will then be based on the lower value. You'll have until October 15, 2016, to undo the 2015 conversion if you change your mind again.


But before you recharacterize, consider other factors that could affect the tax bill on the conversion. You may not want to do it if your income (and tax bracket) is higher this year than it was last year, even if your investments have decreased in value since then. Also be careful if the extra income from the conversion could make you subject to the Medicare high-income surcharge, which would be the case if your adjusted gross income for the year is greater than $85,000 if you're single or $170,000 if you're married filing jointly. See What You'll Pay for Medicare in 2015 for details.

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 IRA to the traditional IRA, without sending the money to you.

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