You Can 'Undo' a Roth Conversion: Just Watch the Rules
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 will owe on the Roth IRA conversion, 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 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 Roth IRA 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 2017, for example, you have until six months after the due date of your 2017 income tax return—October 15, 2018—to recharacterize your 2017 Roth IRA conversion. (You don’t need to have filed for a tax extension to get this extended time to undo your conversion.) After that, you’re out of luck.