If you converted a traditional tax-deferred individual retirement account into a Roth IRA but found the conversion didn’t work out to your advantage, you can reverse the transaction by a process the Internal Revenue Service calls “recharacterization.” Basically, this process allows you to undo your conversion, restore your traditional IRA, and avoid tax liability on the conversion transaction. But you must act within time limits.
If you want to undo an IRA conversion, you must act by Oct. 15 of the year after the year you made the conversion. For example, if you converted an IRA to a Roth in 2011, you have until Oct. 15, 2012 to reverse that conversion. You would still have to pay the taxes associated with your conversion by the April 15, 2012 due date for your 2011 tax return, but the tax payment would be refunded to you if you reversed the conversion in time. If you start to have doubts about your conversion, you can file for an automatic extension to October for filing your tax return.
To reverse the conversion, file a recharacterization form with your IRA fiduciary, instructing that your Roth account be recharacterized as a traditional IRA. At the end of the year your fiduciary will send you a form 1099-R that you enter on line 15a of your 1040 return. You enter zero as your taxable amount on line 15b. Then you file your return. If you had already filed, you must file an amended return for the conversion year by the Oct. 15 due date.
You might want to reverse a Roth conversion and return to the traditional IRA because of changes to your circumstances after you made the conversion. For instance, if the value of your investments plummeted after you converted the account, you would owe taxes on money you no longer had. Or if your other taxable income came in well above what you expected, the tax on the converted account could put you in a higher tax bracket. Or you simply might not have enough money to pay the taxes. The IRS allows you to reverse an IRA conversion for any reason.
When you reverse an IRA conversion you go back to where you started, as if the Roth conversion never happened. That means you regain your IRA conversion rights, subject to timing limits. If you made an IRA conversion in 2011 but waited until 2012 to reverse the conversion, you must wait at least 30 days from the reversal date before doing another conversion of your account. If you converted and reversed the account in the same year, you must wait until Jan. 1 of the next year to do another conversion.
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