Act Soon to Undo a Roth Conversion

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Act Soon to Undo a Roth Conversion

If you converted a traditional IRA to a Roth in 2009 then your account lost value, you must recharacterize it by October 15 to lower your tax bill.

Last year, I converted $100,000 from a traditional IRA to a Roth, but now my account is worth just slightly more than $80,000. Can I still undo the conversion and lower my tax bill?

Yes, but you need to act soon. You have until October 15 to undo a Roth conversion made in 2009. If you meet the deadline, you can file an amended tax return for 2009 (Form 2010X) and reclaim the taxes you paid on the conversion. If you convert to a Roth this year, you have until Oct. 15, 2011, to change your mind

If you were in the 25% tax bracket before adding the conversion amount to your taxable income, the switch to the Roth cost you more than $25,000 because some of the money would have been pushed into the 28% bracket. Undoing the conversion (a process called recharacterization) retroactively wipes out that tax bill. This makes sense even if you really want a Roth. If you wait 30 days after the recharacterization, you can reconvert the account. And you’ll owe tax only on the shrunken balance – a little more than $80,000 in your case.

Undoing the Roth conversion can make sense even if the IRA balance has not declined. Say you’re in a different financial situation than you were when you made the switch, and you need the money you paid in taxes -- for example, if you’ve lost your job 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.

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Reconverting the traditional IRA to a Roth in 2010 buys you more time to pay the tax bill. A special rule allows taxpayers who convert this year to report half the income on their 2011 return and the rest on their 2012 return. Putting off the tax bill could backfire, though, if tax rates increase -- see What Will Congress Do to Your Taxes?


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.

For more information about recharacterizing, see A Mulligan for Roth IRA Conversions. And for more about Roth conversions, see 2010: Roth Conversions for Everyone .

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