Roth IRA Recharacterization Deadline is Approaching!

For those taxpayers that converted their traditional IRA to a Roth IRA in 2010, October 17, 2011 is the last day you are able to recharacterize. Recharacterization is the “undo feature” of roth conversions. Each taxpayer is allowed to reverse their roth conversion and transfer these funds back to a traditional IRA at absolutely no tax cost. It is as if the conversion never happened.

Roth IRA Recharacterization

If you are considering a recharacterization, here are some important points to keep in mind:

  1. Recharacterizations can only be done as a direct transfer of funds.
  2. If you already filed your 2010 individual return, you must amend in order to report the recharacterization and reduction in taxable income.
  3. For only 2010 conversions, the IRS allowed a two year deferral. If the roth is recharacterized, this two year deferral is lost for good.
  4. Watch out for RMDs! If you are subject to required minimum distributions, you calculate these distributions using your traditional IRA account balance as of December 31st. When you recharacterize back to a traditional IRA, your 2010 year-end balance just increased affecting your 2011 RMD calculations. You may have to take an additional distribution before year end.

It is always best to speak with your advisors before making these decisions. There is only a little left. The recharacterization transaction must be completed by October 17, 2011.