by Cindy Randolph
If you converted any portion of your traditional IRA to a Roth IRA in 2015, you have until October 15, 2016, to complete a “do-over” – also known as a recharacterization. This will erase the Roth IRA conversion, treating it as if it never occurred. Your 2015 taxable income will be reduced by the recharacterized amount and you could be eligible for a refund of the amount of taxes already paid on that amount.
If your Roth IRA has lost value since your 2015 conversion and you do not want to pay taxes on an amount which no longer exists in your traditional IRA, you may want to consider recharacterizing. You should consult your tax preparer to determine if it is worthwhile to do so, as it will be necessary to amend your 2015 tax return if it has already been filed.
You may recharacterize all or a part of the conversion. However, this is not the amount that will be returned to your traditional IRA. In actuality, it is the current value of the recharacterized amount which will be returned. Most custodians will run a net-income calculation to determine the gains or losses which will be allocated to the amount being recharacterized. If your custodian will not run the calculation, there is a worksheet in Publication 590-A on the IRS website which can be used. The resulting net amount is what will be transferred back to your traditional IRA.
It is important to note that most indices have been positive this year to date, so it may not be advantageous to recharacterize a 2015 conversion. However, every time you make a Roth IRA conversion in the future, you should evaluate whether it would be beneficial to “undo” that conversion by October 15th of the following year – especially in years with down markets.
Cindy Randolph, a Member of Ed Slott’s Master Elite IRA Advisor GroupSM, is the Client Relations Manager at Manchester Financial, an Investment Counsel/Wealth Management firm located in Westlake Village. For more information call 800-492-1107.
This material is provided for general and educational purposes only, and is not legal, tax or investment advice. For each strategy or option mentioned, there are detailed tax rules that must be followed.