In Down Market, Consider Recharacterizing Your Conversion to a Roth IRA

AAFCPAs reminds our clients and friends that October 15^th is the deadline for re-characterizing (“undoing” or “reversing”) a rollover or conversion to a Roth IRA from a traditional IRA made in 2014. This is a rare opportunity offered by the IRS, where you, as a taxpayer, may undo a tax strategy that may no longer be economically beneficial.

A key factor in the decision to recharacterize is whether the value of the account has dropped from the value on which you paid tax at the time of the conversion. With the recent decline in the markets, unfortunately, this may be the case.

Example: Tax Benefits of Recharacterizing Your Conversion to a Roth IRA

For illustrative purposes, let us assume that you converted a $50,000 traditional IRA to a ROTH IRA in 2014.  If you were in the 25% tax bracket, your tax cost was $12,500.  Now, in September of 2015, the markets are down, and let’s assume that the value of your Roth IRA has decreased to $40,000.  The original conversion from 2014 can be reversed, and converted (recharacterized) back to a tradition IRA.  Upon this recharacterization, you can amend your 2014 tax return if already filed, and recoup the original tax (the $12,500).  If still appropriate as a strategy, and assuming the same tax bracket, you can then convert the $40,000 from the traditional IRA back to a Roth IRA for a tax cost of $10,000.  If you recharacterize all or part of a rollover or conversion to a Roth IRA, you cannot reconvert the amount recharacterized to the same or another Roth IRA until the later of 30 days after the recharacterization, or the year following the year of the rollover or conversion.

AAFCPAs reminds clients of the approaching deadline, and advises clients to consider this rare opportunity offered by the IRS to undo a previous tax strategy.  We know every tax situation is unique and requires a careful and comprehensive plan.  We communicate regularly and openly with our clients to ensure a full understanding of all strategic options available. AAF’s proactive and innovative approach to tax and financial planning enables our clients to manage their portfolio to minimize their tax burden.

If you have any questions about the re-characterization of Roth rollovers and IRA conversions, please contact your AAFCPA partner, or Joel Aronson, CPA, PFS, MBA, at 774.512.4114, jaronson@nullaafcpa.com.

AAF Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where AAF Wealth Management and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by AAF Wealth Management unless a client service agreement is in place.