Time May Be Running Out to Recharacterize Your Roth IRA Conversion

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So, you converted a traditional IRA to a Roth IRA last year, paid tax on the converted amount, and your Roth tanked. Help may be available if you hurry. If you meet the time deadlines, you can "unconvert or recharacterize all or part of the Roth IRA conversion you made during the last calendar year. The re-characterization will return you to a tax position as if you had never made the Roth IRA conversion. You will have a lower balance in your IRA (remember your investment tanked), but at least you will not have to pay the taxes on the conversion or you will get a refund if the taxes were already paid.

If it is now before April 15 of the year after your conversion and you have not yet filed your tax return, you may make the proper "election and transfer" (see below) to recharacterize your conversion before you file your tax return. The same is true if it is before October 15 of the year after the conversion, and you have not yet filed your return but you have properly obtained an extension (using IRS Form 4868) to file your return through October 15.

If you filed your tax return by the normal due date (usually April 15th), you have until October 15 of the year after conversion to properly undo it with a qualified recharacterization even if you did not file for an extension with Form 4868. If this is the case, you will need to make the election and transfer to recharacterize it by October 15 and file an amended tax return by the normal due date for amended returns (normally 3 years after the original return was filed). The amended return is filed on Form 1040X with the words "Filed Pursuant to Section 301.9100-2" written along the top margin of Form 1040X (IRS forms are available from the IRS website, http://www.irs.gov/).

How to Make the Recharacterization "Election"
Before you file your original or amended return, you must notify the Trustees (the financial institutions holding your IRA-for both the IRA and the Roth IRA) on or before the transfer date that you want to unconvert or recharacterize a particular Roth IRA. The notification must contain the following information:

the type and amount of the contribution to the Roth IRA to be recharacterized;

the date on which the contribution was made and the tax year for which it was made;

a direction to the Trustee to transfer, in a trustee-to-trustee transfer, the amount of the contribution and any net income allocable to it to the Trustee of the recipient IRA;

and any additional information needed to make the transfer.

If both of your IRAs are maintained by the same Trustee, simply redesignating the IRA will be treated as a trustee-to-trustee transfer.

You must also notify the IRS of the election by attaching Form 8606, Nondeductible IRAs, to the return. Also, attach a statement to the return explaining the recharacterization.

James Lange is a tax attorney and CPA with a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financia PlanningKiplinger's Retirement Report and The Tax Adviser.  For more informaiton please visit www.rothira-advisor.com

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