You have until October 15, to undo a 2011 Roth conversion
If you converted a traditional IRA to a Roth IRA in 2011 and your Roth IRA has sustained losses, you may want to consider whether it makes sense to undo (re-characterize) your conversion. You have until October 15, 2012, to undo your 2011 conversion. Also, if you've already filed your federal income tax return for 2011, you'll need to file an amended return if you re-characterize.
A re-characterization can help you avoid paying income tax on the value of IRA assets that have been lost. When you re-characterize, your conversion is treated for tax purposes as if it never happened.
For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2011. However, due to market volatility, that Roth IRA is now worth only $60,000. If you don't undo the conversion you'll pay federal (and possibly state) income tax on $100,000, even though the current value of those assets is only $60,000. If you undo the conversion, you'll be treated for tax purposes as if the conversion never happened, and you'll wind up with a traditional IRA worth $60,000--and no resulting tax bill.
If you re-characterize your 2011 conversion, you're allowed to convert those dollars (and any earnings) to a Roth IRA again ("reconvert") but you'll have to wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. Keep in mind that even though the amount you re-characterized, and any earnings, is subject to a 30-day waiting period, any other amounts in your traditional IRAs are not subject to the waiting period, and you can convert all or part of those dollars to a Roth IRA at any time.
Whether it makes sense to re-characterize your Roth conversion depends on several factors, including the extent of the losses in your Roth IRA, and your expectations of where the markets may be headed. If you are wondering if a conversion is right for you, contact one of our financial professionals at FineMark and we’ll help you through it.