Q: I am in the process of converting a traditional IRA to a Roth IRA. If I later find it desirable to recharacterize, is there any waiting period before I can re-convert the account into a Roth? -- LW, via email
A: Yes, there is.
But let's start by filling in the background for everybody else.
When you convert a traditional IRA into a Roth IRA, you must pay income taxes on the amount you convert. (In a special one-time deal, if you do a conversion in 2010, you have the option of either declaring the conversion in your 2010 income tax return, or dividing it between your 2011 and 2012 returns.)
Why would you want to do a conversion? Because your earnings and withdrawals in the traditional IRA are only tax-deferred. You'll pay taxes on them when you start tapping the account. By contrast, your future earnings in the new Roth IRA will be tax-free; and so will your withdrawals from the Roth IRA, after you're 59 and a half years old and have owned the account for five years.
(Even so, Roth conversions aren't a no-brainer. In a future post, I'll discuss their pros and cons. For now, let's stick with your question.)
Let's say you're converting a $100,000 IRA -- and let's keep it simple by assuming that you plan to include that $100,000 in your 2010 taxable income rather than spread it over future tax years. We'll assume the tax on the $100,000 conversion is $28,000. You'll pay it when you file your 2010 return in April 2011.
Then after doing the conversion, you decide it was a bad idea. Maybe the market has tanked and by September, your $100,000 account is worth only $80,000. With a sinking heart, you realize that makes no never mind to the Internal Revenue Service: Come April 2011, you'll still owe the $28,000 tax on a $100,000 conversion.
Can you avoid that tax?
Yes. You can wipe the slate clean by turning your new Roth IRA back into a regular IRA. This is called a `recharacterization.'
You're allowed to recharacterize a 2010 Roth conversion right up until the final due date of your 2010 income tax return. With extensions, that means you have until October 15, 2011 to recharacterize a 2010 Roth conversion. (If you don't decide to recharacterize the account until after you're paid your 2010 taxes, you can file an amended 2010 return and get a refund for the $28,000 tax you paid on the conversion.)
Your question is, what if you change your mind again? How soon can you turn that account back into a Roth IRA?
Not until the year following the original conversion, or the 31st day after the recharacterization, whichever comes later, says Barry C. Picker, a Brooklyn, New York tax accountant and IRA expert.
In other words, if you do the conversion this month, and then recharacterize your Roth IRA in November 2010, you'll be able to reconvert it as early as January 2011. If you don't recharacterize your 2010 conversion until, say, May 1, 2011, you'll be able to reconvert thirty days later -- on June 1, 2011.
A: Yes, there is.
But let's start by filling in the background for everybody else.
When you convert a traditional IRA into a Roth IRA, you must pay income taxes on the amount you convert. (In a special one-time deal, if you do a conversion in 2010, you have the option of either declaring the conversion in your 2010 income tax return, or dividing it between your 2011 and 2012 returns.)
Why would you want to do a conversion? Because your earnings and withdrawals in the traditional IRA are only tax-deferred. You'll pay taxes on them when you start tapping the account. By contrast, your future earnings in the new Roth IRA will be tax-free; and so will your withdrawals from the Roth IRA, after you're 59 and a half years old and have owned the account for five years.
(Even so, Roth conversions aren't a no-brainer. In a future post, I'll discuss their pros and cons. For now, let's stick with your question.)
Let's say you're converting a $100,000 IRA -- and let's keep it simple by assuming that you plan to include that $100,000 in your 2010 taxable income rather than spread it over future tax years. We'll assume the tax on the $100,000 conversion is $28,000. You'll pay it when you file your 2010 return in April 2011.
Then after doing the conversion, you decide it was a bad idea. Maybe the market has tanked and by September, your $100,000 account is worth only $80,000. With a sinking heart, you realize that makes no never mind to the Internal Revenue Service: Come April 2011, you'll still owe the $28,000 tax on a $100,000 conversion.
Can you avoid that tax?
Yes. You can wipe the slate clean by turning your new Roth IRA back into a regular IRA. This is called a `recharacterization.'
You're allowed to recharacterize a 2010 Roth conversion right up until the final due date of your 2010 income tax return. With extensions, that means you have until October 15, 2011 to recharacterize a 2010 Roth conversion. (If you don't decide to recharacterize the account until after you're paid your 2010 taxes, you can file an amended 2010 return and get a refund for the $28,000 tax you paid on the conversion.)
Your question is, what if you change your mind again? How soon can you turn that account back into a Roth IRA?
Not until the year following the original conversion, or the 31st day after the recharacterization, whichever comes later, says Barry C. Picker, a Brooklyn, New York tax accountant and IRA expert.
In other words, if you do the conversion this month, and then recharacterize your Roth IRA in November 2010, you'll be able to reconvert it as early as January 2011. If you don't recharacterize your 2010 conversion until, say, May 1, 2011, you'll be able to reconvert thirty days later -- on June 1, 2011.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved
Can you convert your regular ira to roth ira a little bit at a time, i.e. like 10% every year?
Posted by: Joaquin Tagarao | 06/15/2012 at 11:13 PM
Yes, you can.
Posted by: Lynn Brenner | 06/18/2012 at 01:39 PM