Wealth Management Insights
    Are you regretting your 2010 Roth IRA conversion?
    August 2011
For the first time in 2010, higher-net-worth investors had the option of converting a Traditional individual retirement account to a Roth IRA. Of course, what may have seemed like a worthwhile tax hit when stocks were charging higher could feel very different in light of recent market and account value declines. If you took advantage of the Roth conversion opportunity last year and are now second-guessing that decision, you have options. But there are some important considerations to take into account.
What you should know:
1.
What is a Roth recharacterization?
A Roth recharacterization is the process of unwinding a Roth contribution, conversion or rollover. It provides the taxpayer with the ability to fine tune part or all of the conversion amount long after the initial conversion has been completed.
  • You can recharacterize a conversion from a Traditional IRA or a rollover from a qualified retirement plan by making a trustee-to-trustee transfer from the Roth IRA to a Traditional IRA.
  • Rollovers from a qualified retirement plan must be recharacterized to a Traditional IRA, not back to the original qualified retirement plan.
  • Recharacterizations are not available for conversions from a Traditional qualified retirement plan to a Roth qualified retirement plan (known as “in-plan conversions”). For example, conversions from a 401(k) to a Roth 401(k) cannot be recharacterized.
2.
 What is the deadline for a recharacterization?
The recharacterization period begins the day you make your conversion and is open through the due date of your tax return – plus extensions – for that year. In a typical year, this would mean Oct. 15 is the final deadline. However, because the 15th falls on a Saturday this year, most taxpayers have until Oct. 17, 2011, to recharacterize their 2010 Roth conversions.
  • If you already filed your 2010 taxes, you can still recharacterize by the October deadline as long as you filed your return or extension on time.
  • After recharacteriziation, you may choose to reconvert those same dollars back to a Roth at a future time (Jan. 1 of the following year or 30 days after recharacterization, whichever is later).
  • You may still convert other assets within your Traditional IRA at any time, but those that were previously recharacterized back to a Traditional IRA must wait.
3.
 Why do people recharacterize?
You are not required to provide the IRS with a reason for the recharacterization. However, there are many factors that can lead investors to recharacterize, ranging from an inability or reduced desire to pay the upfront taxes on a conversion to an anticipated change in tax status for the account holder or beneficiary.
  • Probably the most common reason for recharacterization is a decline in the value of a converted amount.
  • When you recharacterize some or all of a Roth conversion, the amount is adjusted for any gains or losses attributed to it within the account. These gains or losses, known as “net income,” will reduce or increase the amount recharacterized to the Traditional IRA.
  • You are not allowed to cherry-pick assets for recharacterization, so it is not possible to recharacterize only assets in underperforming investments. Any gains or losses will be prorated across the entire Roth IRA.
4.
 How much paperwork is involved?
If you’ve already filed your 2010 taxes, you will need to file an amended return. Also, the IRA custodian is required to report the Roth conversion even if the converted amount is later recharacterized. This means that if you recharacterize, you will receive two Forms 1099-R and two Forms 5498; one of each for the Traditional and the Roth IRAs. Your tax professional can advise you of the specific reporting requirements for your situation.
What you should do now:
The decision whether to recharacterize can be complex and dependent on a number of factors. You should consult your Financial Advisor and tax professional to evaluate your options with an informed understanding of your specific goals and current financial situation. Together you can determine what makes the most sense for your long-term plans.

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