Recent market declines may have created a tax planning opportunity when it comes to recharacterizing Roth IRA conversions executed in 2010. In recent weeks, many investors have moved from equities to assets that traditionally have been considered less risky, such as U.S. Treasuries. This “flight to safety” has seen equity values decline and may have created a recharacterization opportunity for you.
The value of the assets converted last year from your traditional IRA to your Roth IRA may have fallen along with the stock market, so you may want to consider unwinding your Roth IRA conversion. Converting back to a traditional IRA can eliminate the income tax due on the amount originally converted. And you still have until October 17 to undo the original conversion. What’s more, if you’ve already filed your taxes, you’ll receive a full refund on the income tax paid on the conversion.
Recharacterization impacts both your income-tax planning as well as your overall financial planning. A Roth IRA may still be a viable investment strategy for your long-term plans. Even if you undo an earlier conversion, you can later reconvert your assets – hopefully while asset values are still low – back into a Roth IRA, when it makes the most sense for you.
While there can be a lot of benefits, the rules surrounding recharacterization and reconversion are quite complex and require careful forethought.
Compliance: M11-1846
Bountiful, UT 84010