4 Roth recharacterization considerations

Consider the 2-year tax deal

The law change that eliminated the income restriction on traditional-to-Roth IRA conversions also gave taxpayers two years to pay any due taxes on the change as long as the conversion took place in 2010.

You can pay taxes on half of the converted IRA money on your 2011 taxes and the remainder on your 2012 return. But if you recharacterize the 2010 IRA conversion, says CPA Ed Slott, the two-year tax payment deal is dead.

If you later decide to convert to a Roth, all the taxable conversion income must be reported and paid in the tax year in which the move is made, says Slott, publisher of Ed Slott's IRA Advisor newsletter.

Depending on your other income factors, spreading the taxes over the 2011 and 2012 tax years could reduce the amount of tax owed, says Slott. So keeping the Roth converted in 2010 might offer the least tax costs.

Wait until the last minute

The conventional tax wisdom is not to delay filing until the ultimate deadline. Throw out the conventional wisdom when it comes to a Roth recharacterization.

Stock market watchers are well aware the market can change dramatically and quickly. An IRA can lose much of its value one day and recover it the next.

Taking as much time as possible before making any irreversible recharacterization is generally a good idea. For 2010 conversions, that means you have until Oct. 17 since the regular deadline falls on a weekend.

But don't wait until that date to decide; do it the week before.

You can't move the money back to a traditional IRA yourself. The change must be trustee-to-trustee. And unlike your tax return that is considered filed on time if it's postmarked on the deadline day, a Roth recharacterization must be completed by the deadline.

Check with your IRA custodian about specific policies and procedures to ensure that your Roth recharacterization will be processed in time, says Slott.

Think long term

While you're taking as much time as allowed to decide about recharacterization, also evaluate your overall retirement savings plan.

"You can't react to day-to-day market activity," says Slott. "Going tax-free with a Roth is forever. There are going to be ups and downs."

So don't overreact to market gyrations.

"You'll drive yourself crazy and then you'll probably make a bad move," says Slott. "You'll kick yourself if you try to time the market. Retirement savings is a very long-term proposition."


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