Many individuals who converted Traditional IRAs to Roth IRAs in 2010 found themselves watching the value of their IRA decreasing due to market conditions. If you are one of those individuals, your 2010 tax return would include income from the appreciation of your IRA at the time you converted to a Roth IRA. You would have paid tax effectively on phantom income, as the income would be higher than today's market value of your IRA. An option still exists for some tax relief, even if you have already filed your 2010 tax return.
Recharacterizing your Roth IRA back to a Traditional IRA will negate the original conversion. The recharacterization further allows you to exclude the original conversion – and tax due – from your 2010 tax return, because it's as though nothing happened.
This tax saving strategy also does not eliminate the option to then reconvert your Traditional IRA back to a Roth IRA. Following a 30 day waiting period, the IRA account can again be converted and the tax is then calculated on the value at the date of the new conversion which presumably will be on less earnings than the original conversion during 2010. Note: The waiting period is mandatory and applies regardless of whether the recharacterization occurs during the tax year in which the amount was converted to a Roth IRA or the following tax year.
The 2 year spread to pay the tax that was previously available for 2010 conversions is not available for a 2011 conversion and the tax is due with the 2011 return. Depending on the market conditions of your portfolio, this may still provide you with tax savings and achieve your retirement objectives.
- In order to take advantage of this relief, you must act before the due date of your 2010 tax return, including extensions, which this year is October 17, 2011 (unless you live in a Federally declared Disaster Relief zone which received additional time to file).
- If you have already filed your 2010 tax return, an amended return must be filed by the extended due date.
- If you have another IRA that was not previously converted, there may be additional tax planning opportunities available to you as well .
- Contact your Marcum LLP tax professional if you would like to discuss these and / or other strategies in more detail.
A special thanks to article contributor Olga Blyweiss, CPA, MST.