DON'T RECHARACTERIZE TOO SOON
Staying with IRA Updates' August theme of
recharacterizations, here is an article on the virtue of
patience when it comes to the decision-making process with
Some taxpayers who did Roth conversions earlier this year
have seen their account values drop. As a result, they are
considering doing a recharacterization of their Roth back to
an IRA. But maybe they should wait a while. Why? Maybe,
if they wait long enough, the Roth account will recover and
not need to be recharacterized.
The better answer, however, lies in the rules for
reconverting assets once they have been recharacterized. A
2010 Roth conversion that is recharacterized in 2010 cannot
be reconverted until at least 2011. What if you converted in
January 2010, your assets decline, so you recharacterize in
August 2010? Now you cannot reconvert those funds to a
Roth IRA until January 1, 2011. If the account recovers, you
will have to pay income tax on the increased value when you
reconvert. A 2010 conversion that is recharacterized in 2011
can be reconverted after a 30-day waiting period. In no case
can you reconvert in less than 30 days.
The biggest issue, however, may be the ability to spread the
taxes over 2 years, 2011 and 2012. That option is only
available for a 2010 conversion. If you recharacterize a 2010
conversion in 2010 you lose that option - even on your
reconversion. The reconversion will be done in 2011 and
you cannot split the income on a 2011 conversion.
Everyone who timely files their tax return and pays their
taxes has until October 15th of the year after the conversion
to do a recharacterization. For conversions done in 2010,
you have until October 17, 2011 to recharacterize. You
don't have to do it now.
Take your time and evaluate all your options before making
the recharacterization decision.