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 Re-Think Your IRA Conversion


With the recent volatility in the stock market, taxpayers may want to evaluate their traditional and Roth IRA accounts and reconsider moves made in 2010 or 2011. If you act by October 17, 2011, you have a last chance to "reach back" and change the nature of (re-characterize) IRA contributions -- including conversions to Roth IRAs -- you made for the 2010 or 2011 tax years. You may want to re-characterize an IRA contribution for one of many reasons. For instance, you made your traditional IRA-to-Roth IRA conversion when your traditional IRA's investment portfolio stood at a very high valuation, and has since dropped to lower levels.

An IRA re-characterization can be done as long as you filed your 2010 return by April 18, 2011, or got a filing extension and file your return by the extended due date. So, even if you have already filed your 2010 tax return you can still make changes. That said, if you do convert IRAs to their former state, you will be required to file an amended return for 2010, if you have already filed it.


The re-characterization mechanism allows you to treat the taxable conversion as if it had never been made. (Note: there could be alternative minimum tax implications involved with a re-characterization.) You have until October 17 to make any of the following moves:


  • If you contributed to a traditional IRA (on a deductible or non-deductible basis) for the 2010 tax year, you can recharacterize the contribution and treat the money as having been contributed to a Roth IRA instead (assuming you qualify for a 2010 Roth IRA contribution).
  • If you contributed to a Roth IRA for the 2010 tax year, you can recharacterize the contribution and treat the pay-in as having been made to a traditional IRA instead (assuming you are otherwise eligible to do so).
  • If you converted funds from a traditional IRA to a Roth IRA for the 2010 tax year, you can "undo" the conversion.  In effect, it's as if the funds never left the traditional IRA.

If you re-characterize a 2011 conversion, you must generally wait until 2012 to re-convert it back to a Roth IRA. The rule is that if you convert a traditional IRA to a Roth IRA and then re-characterize it back to a traditional, you must wait until the beginning of the tax year following the year of conversion or 30 days after the re-characterization, whichever is later, to re-convert it back to a Roth.



For assistance analyzing whether an IRA re-characterization makes sense for you, please contact your accountant at Berntson Porter & Company at 425-454-7990.

































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