Roth Reconversion Rules

by Herb Kirchhoff

The Internal Revenue Service rules for individual retirement arrangements, or IRAs, allow you to move your retirement savings between a traditional tax-deferred IRA and a non-taxed Roth IRA. You can convert a traditional IRA to a Roth IRA, undo that conversion if it didn’t work out for you, and later reconvert from traditional back to Roth. But there are certain rules you must follow for a successful transaction.

First You Convert

You can withdraw part or all of your traditional IRA and convert the funds to a Roth IRA. If you do a direct same-trustee or trustee-to-trustee conversion, you will owe income tax on the converted amount but no tax penalty or tax withholding. That means you should have separate funds to pay the taxes. But if the conversion proved to be a bad idea because, say, you lost money on your Roth investments or you find you can’t afford the tax bill, you can reverse the conversion through a process called recharacterization if you act by Oct. 15 of the year following your conversion. It will be as if you never did the conversion in the first place and you won’t owe any tax.


If circumstances change and you want your traditional IRA to be a Roth account again, you can reconvert to a Roth if you meet certain timing rules. You can’t convert and reconvert from a traditional IRA to a Roth IRA in the same tax year. The reconversion must wait until January of the following year. But if you reversed a conversion in December, you must wait a minimum of 31 days before you can reconvert. For example, if you reversed a conversion on Dec. 12, you must wait until the following Jan. 13 to do a reconversion. In this case you would owe the conversion tax in 2011, not 2010.

Tax Treatment

If you converted, say, $100,000 from a traditional IRA to a Roth IRA but your Roth account investments lost money all year, you can use reversal and reconversion to avoid owing taxes on the money you lost. If you had only $60,000 left in your Roth, you can recharacterize that money back to a traditional IRA, and it will be as if you had lost the $40,000 in your traditional IRA. You wouldn’t owe any tax. If you later reconverted your $60,000 remainder back to a Roth IRA, you would owe tax on $60,000. The other $40,000 in investment losses simply disappears for conversion tax purposes.

No Income Limit

Prior to 2010, IRS rules barred Roth conversions or reconversions if your annual income exceeded $100,000. But Congress repealed the income limit effective January 2010. This means any taxpayer can do a Roth conversion or reconversion regardless of income. Taxpayers who converted or reconverted in 2010 were allowed to spread the tax bite over two years, but that option wasn’t extended to 2011 or subsequent tax years. People who converted and reversed in 2010 for a reconversion in 2011 lost the option to spread out the tax payment and must pay all the tax with their 2011 tax return.

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