When the Stock Market Drops Like it Has Recently, One Thing to Think About is Roth IRAs.
2010 Roth IRA Conversions
If you or your clients, friends or family were part of the masses that converted to a Roth IRA in 2010, then you need to take the next two months to re-evaluate the conversion. The amount of the Roth conversion should be compared to its current fair market value, and if it has declined, you should consider an “undo” or recharacterization.
You can request your IRA custodian to recharacterize your Roth conversion and it will be transferred back into a traditional IRA as if the original conversion never happened.
- If your 2010 tax return is on extension, then you can recharacterize the conversion and properly report it on your original return filed by October 17, 2011.
- If you filed your return by the April deadline and accepted the default two-year spread of the income recognition, then you can still recharacterize the conversion. It must be completed and then reported on an amended return filed by October 17, 2011.
- If you filed your return by the April deadline and you elected to recognize the conversion into income in 2010, then you cannot recharacterize it. This election cannot be changed after the original due date of your tax return.
When can you reconvert your recharacterization of your 2010 conversion back into a Roth IRA (what a mouthful)? You have to wait 30 days until you can reconvert it back into a Roth IRA.
The election to recharacterize is irrevocable, in other words, you cannot undo the undo. So this decision does not necessarily need to made today, rather it should be contemplated over the next two months and made prior the October 17th deadline.
2011 Roth Conversions
2010 was not the only year that everyone could do a Roth conversions. It can still be done today, however the two-year spread of the income recognition was only available to 2010 conversions. Whenever the market is at a low point, it is a good time to consider a Roth conversion. You will always have the benefit of hindsight with the potential recharacterization next year.
If you have any questions, please contact your ORBA representative or Rob Swenson at 312.670.7444.