Tax and financial advice from the Silicon Valley expert.

Should you “undo” a 2010 Roth conversion?

Roth conversions were heavily promoted during 2010 because a special election was available to spread the taxable income from a conversion over two years to 2011 and 2012.

The opportunity was to accumulate additional value during 2010 while deferring the tax to 2011 and 2012.

Here is a link to an article I wrote about Roth conversions during 2010.

During the last few months, there has been a significant decline in the stock market. Some taxpayers may find that they are paying income taxes for a value that no longer exists.

For example, if the value of the Roth account converted from a regular IRA during 2010 declined from $200,000 to $100,000 and the taxpayer is subject to the maximum 35% federal income tax rate, the federal income tax attributable to the Roth conversion could be reduced from $70,000 to $35,000 by “undoing” the 2010 Roth conversion and then making the conversion in 2011.

The Internal Revenue Code permits this reversal to be done. It is called a “recharacterization”. The Roth account trustee must be notified of the intention to recharacterize the Roth conversion to a transfer to a regular IRA account. The plan assets must also be transferred from the Roth IRA account to a regular IRA account in a trustee-to-trustee transfer. According to questions and answers posted to the IRS web site (, the final date for the notice and transfer to be done for a 2010 Roth conversion is October 17, 2011.

When a recharacterization for 2010 is done, a Roth conversion can’t be done for 2011 until more than 30 days after the date of the recharacteriation.

There is some inconvenience involved in doing a recharacterization, including filing an amended 2010 income tax return if your has already been filed. The amended return can be done after October 17, 2011. If the decline in value has been small, I would leave the Roth conversion alone.

If you are wondering if you should “undo” a Roth conversion, I recommend that you consult with your investment advisor/financial planner and your tax advisor.

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Tax and financial advice from the Silicon Valley expert.