Unwinding Roth IRA conversions

Email to a Friend

Time is running out on your ability to recharacterize, or reverse, a conversion of a conventional individual retirement account (IRA) to a Roth IRA. The deadline for 2016 is Oct. 17, and efforts are underway to repeal this tax strategy.

Converting an IRA into a Roth IRA means that consumers can make tax-free withdrawals. However, deposits to a Roth IRA are taxed, so a conversion would mean that you’d owe taxes on the full amount that was converted.

Experts tell us that recharacterization is a good strategy if the value of your Roth IRA account declines. For example, if you converted an IRA that had a balance of $50,000 into a Roth IRA in January 2016, you’d owe taxes on the $50,000 when the tax bill came due in 2017. However, if the value of the Roth IRA declined to, say, $40,000, you could recharacterize the Roth IRA back to a conventional IRA and reconvert (in a new tax year) into a Roth IRA and then pay taxes on the lower amount.

Generally, consumers should consider recharacterization if their income status changed, such as after receiving a larger-than-expected bonus, which would bump them into a higher tax bracket, says Angela DiCastri of Northwestern Mutual.