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Articles: Can you undo a Roth conversion?

With all the buzz about Roth IRA conversions in 2010, you may have taken the plunge. But now you want to “undo” the conversion. Is it possible? Yes. This technique is called the Roth IRA recharacterization.

The deadline for rechar- acterizing a Roth is your tax return due date plus extensions. So you effectively have until October 17, 2011, to recharacterize a 2010 conversion.

Background: When you convert a traditional IRA to a Roth IRA, you are taxed on the amount transferred.  But qualified distributions (e.g., distributions after age 59 1/2) from a Roth in existence at least five years are completely tax-free.

Plus, unlike a traditional IRA, you don’t have to take required distributions after age 70 1/2.

Prior to 2010, you could not convert a traditional IRA to a Roth in a year in which your modified adjusted gross income (MAGI) exceeded $100,000. But this rule no longer applies. Also, for a conversion occurring in 2010, you can split the taxable income evenly over 2011 and 2012.

However, if you converted to a Roth in 2010, you may find that paying the tax bill dilutes much of the tax benefit of the conversion.  Or maybe you didn’t count on state income tax liability.  Perhaps you did not consider the possibility of rising tax rates. Finally, if the value of the assets has declined since the conversion date, you could face a higher tax bill than you expected.

If it suits your needs, you can convert a recharacterized Roth back into a Roth before the later date of:

  • the beginning of the tax year following the tax year of the conversion
  • the end of the 30-day period beginning the day of the reconversion (regardless of whether the reconversion falls in the year of the conversion or the following year)

For example, if you converted a traditional IRA to a Roth on December 15, 2010, and recharacterized it on January 1, 2011, you cannot reconvert before January 14, 2011.

Finally, be aware that you don’t have to recharacterize the entire amount.  You can undo part of the conversion and keep the rest in the Roth.

Catch a Break for FSAs

Do you still have money in your flexible spending account (FSA) from 2010?  You will be able to use the funds for qualified expenses - such as health care or dependent care expenses - if you act soon.

Generally, FSA amounts are forfeited if they are not exhausted by the end of the year.  This is often called the “use-it-or-lose-it” rule. However, if your employer permits it, you can take advantage of a special 2 1/2-month grace period.  Thus, you have until March 15, 2011, to spend 2010 allocations to an FSA.

Check with your employer to see whether you are eligible for this break.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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