retirement

Last Chance to Undo a Roth Conversion

The window is closing fast to ask your IRA custodian to put that Roth money back into a traditional IRA before the break disappears for good.

The end is near: If you want to reverse a 2017 Roth conversion, you have until October 15. After that date, the recharacterization move for Roth conversions is not only done for this year, it’s done for good.

The Tax Cuts and Jobs Act nixed this mulligan—removing the ability to undo Roth conversions done in 2018 and future years. But the IRS confirmed that 2017 Roth conversions still qualify for recharacterization.

So if you did a Roth conversion anytime in 2017, you have a fast-closing window to ask your IRA custodian to put that money back into a traditional IRA. Do so and—poof!—the conversion and its accompanying tax bill disappear.

Why bother? If the account value fell after the conversion, recharacterization could make sense. Otherwise, you’d owe tax on the higher conversion-date amount. Given the extended bull market, however, it’s less likely you may be in that situation.

The other big reason to undo a conversion is to manage your tax bill for the year. Conversions are taxed at your ordinary income rate. If a 2017 conversion pushed you into a higher tax bracket, then you might want to recharacterize.

And because tax rates were higher across the board last year, compare your conversion tax bill under your 2017 tax rate to what the bill may be under the lower rates effective this year. Even if the value of the conversion stayed steady, you might save money by undoing the 2017 conversion and reconverting the money at today’s lower rates, depending on your personal tax situation. You can reconvert money 30 days after the recharacterization or the year following the original conversion—whichever comes later.

If you requested a six-month extension to file and you recharacterize by October 15 before you file your 2017 return, then you should be all set. You don’t owe tax on the conversion or report it on your tax return.

But if you already filed your 2017 tax return, then you need to file an amended return. File a Form 1040X to remove the conversion and its tax bill from your 2017 return, and you’ll get a refund of the tax you paid on the conversion. You generally have up to three years to file an amended return, but there’s little reason to wait if Uncle Sam owes you money.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
11 Best Monthly Dividend Stocks and Funds to Buy
Kiplinger's Investing Outlook

11 Best Monthly Dividend Stocks and Funds to Buy

Your bills come monthly. Why not your dividend checks? These are some of 2021's best monthly dividend stocks and funds for easier income planning.
May 25, 2021
4 Strategies to Reduce Taxes in Retirement
retirement planning

4 Strategies to Reduce Taxes in Retirement

Don’t let the possibility of higher taxes in the future sink your retirement income plan. Consider these four ways to help manage your taxes, keeping …
May 31, 2021

Recommended

2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021. Payments will start July 15.
June 13, 2021
3 Essentials for a Successful Retirement
retirement planning

3 Essentials for a Successful Retirement

To plan for the next phase of your life, you need clear strategies to provide for these three retirement needs.
June 13, 2021
Child Care Credit Expanded for 2021 (Up to $8,000 Available!)
Tax Breaks

Child Care Credit Expanded for 2021 (Up to $8,000 Available!)

For this year only (so far), families with young children can get a bigger tax credit for childcare expenses. And more families will qualify for the c…
June 12, 2021
Invest in a Roth 401(k) If You Can
401(k)s

Invest in a Roth 401(k) If You Can

Workers of all ages can benefit from stashing away after-tax money now in exchange for tax-free withdrawals in the future.
June 11, 2021