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How to Recharacterize a Roth IRA Conversion

You can 'undo' a Roth conversion: just be careful

A recharacterization is a way to “undo” a Roth IRA conversion. Why would you want to? A recharacterization is most commonly used when the value of the account drops dramatically after you convert it. When that happens, you would end up paying taxes on phantom income—money that was in the account when you converted it but has since disappeared due to investment losses. Even if you have the money to pay the taxes, you may not want to.

You may also want to recharacterize for other reasons. They include:

  • You can’t pay the taxes: your best-laid plans fall through, and you don’t have the money to pay for the income taxes due on the conversion.
  • You made extra money: you get an unexpected windfall, or simply a little extra income, and the additional taxable income from a conversion puts you in a higher tax bracket.
  • You simply changed your mind (no explanation needed).

To recharacterize, talk to your financial advisor or the financial institution holding your account. The calculations can get tricky and are best left to the professionals.

Two additional notes. You don’t have to recharacterize an entire conversion; if recharacterizing a small amount will help avoid some of the consequences listed above, you can just recharacterize that amount. You have a limited time to undo a Roth conversion. If you convert money to a Roth IRA in 2012, for example, you have until the due date of your 2012 income tax return—including filing extensions—to recharacterize your conversion. That gives you until October 15, 2013, to undo your 2012 Roth conversion. After that, you’re out of luck.

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Important Roth Information

Each year, the IRS updates the rules for Roth IRA. Here are all the details for 2013 & 2014: