Have you ever had times in your life when you wish you could get a second chance? There seriously is one thing that you can do over, and that is on a Roth IRA conversion.
I’m referring to what the IRS calls a recharacterization, allowing you to “undo” or “reverse” a conversion to a Roth IRA for certain reasons.
Take Unlucky Louie for example. He converted a pre-tax Traditional IRA invested in stocks to a Roth IRA just before the market crashed.
If he had waited until after the crash to convert, his account value would have been lower, resulting in owing less taxes at conversion.
Even Unlucky Louie, however, can undo the transaction like it never happened. He could tell the trustee holding his Roth IRA to transfer the amount back to a Traditional IRA. If he does this by the due date of his tax return (including extensions), he can treat it like it never happened.
Money rolled to a Roth IRA from an employer plan can also be recharacterized by transferring the money to a Traditional IRA. You generally have until Oct. 15 of the following year to recharacterize. That Oct. 15 deadline for 2014 happens next week.
If you did any conversions to a Roth IRA last year, you may want to check and see if your account value has fallen since you did the conversion now that the stock market is down.
If it has, you can put it back in the Traditional IRA like it never happened. You then can convert it again with a lower account value, which most likely will result in paying less taxes. There is, however, a minimum waiting period before you can convert that same money again later.
If you undo or recharacterize a rollover or conversion from a Roth IRA, you’re not allowed to reconvert the same money again until 30 days after the recharacterization, or the year following the year of the rollover or conversion – whichever is later.
• Mike Piershale, ChFC, is president of Piershale Financial Group. Reach him at firstname.lastname@example.org.