Fast-Approaching Deadline for Recharacterizing a Roth IRA Conversion

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If you converted a traditional IRA to a Roth IRA in 2012, you have until October 15, 2013 to “recharacterize” the account and revert back to a traditional IRA.

In 2010, the $100,000 income limitation on converting a traditional IRA account to a Roth IRA account was lifted.  Since that time, many taxpayers have taken advantage of the conversion option.  Converting a traditional IRA to a Roth IRA requires recognizing income based on the value of the account on the date of conversion.  If the account declines in value between the date of conversion and the date the taxpayer’s income tax return is filed, the taxpayer must report income on assets based on a value that exceeds their present value. 

However, a taxpayer-friendly rule permits the use of hindsight to reverse, or recharacterize, the conversion.  A conversion may be recharacterized at any time prior to the filing date, including extensions, for the income tax return for the year of conversion.  This due date applies whether or not the taxpayer extends his/her income tax return.  A recharacterized IRA account reverts to traditional IRA account status, and the value of the account is not reported as income. 

Therefore, if you made a Roth IRA conversion in 2012 and the value of the account has declined since the conversion, you may be able to recharacterize the account back to a traditional IRA.  Any recharacterization must take place by October 15, 2013.  Contact your trusts and estates professional to further discuss your options regarding Roth IRA recharacterization and your options regarding conversion back to a Roth IRA after a recharacterization.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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