by Richard E. Reyes, CFP
October 17, 2011 is the day of reckoning if you made a Roth conversion in 2010 and now are thinking about not going along with it. Once this date passes, if you converted an IRA or part of an IRA to a Roth IRA in 2010 you will be irrevocably locked into the conversion and the tax bill that comes along with it.
For Investors that made Roth conversions in 2010 that have lost substantial value, the decision to re-characterize is often a no brainer. For example, assuming you converted $100,000 and your account value is now $80,000, it might make sense to undo your conversion and return to a traditional IRA instead. This will keep you from paying the tax on the $100,000 originally converted.
In order to re-characterize or undo your Roth conversion you must first contact your current Roth IRA custodian and tell them that you would like to undo your conversion. This will require paperwork obviously.
The second step after you undo your conversion is, if you filed your 2010 tax return before the October 17th extension deadline you must amend and file your original 2010 tax return in order to report the recharacterization to the IRS. Of course if you have yet to file your 2010 return make sure you do so before October 17. Please make sure that you have a qualified tax preparer or advisor handle this since it can get tricky with a conversion.
If you decide to keep the conversion as is, there is no need to do anything other than pay the taxes owed on the conversion in 2011 and 2012 and keeping and enjoying your tax free growth.
If you are on the fence, here are some reasons you might consider undoing your Roth conversion;
1. You lost a lot value since the date of your conversion
2. You owe the tax and don’t have money to pay the tax
3. There was no benefit for you to actually convert, you just did it because it was the thing to do.
Although these are just 3 there are probably some others that may apply specifically to you. If you have questions on this issue or want to go over your particular situation, just give me a call.
But remember, October 17th is the last day to change your mind.
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Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com. Richard E. Reyes, CFP is an Investment Advisor and President of Wealth & Business Planning Group, LLC (The Financial Quarterback™).