If You Reconvert – You Lose Your Spread to 2011 and 2012
We had a reader ask this question as a follow-up to our previous post on ROTH IRA recharacterizations:
“My wife and I converted our traditional IRAs to ROTHs in November of 2010. Since the market has gone down we are considering the recharacterization back to Traditional. You mentioned we would have needed to file for an extension to do this. I do not understand what you mean by this extension. Can’t we recharacterize by October 15th? If so do we lose the ability to split the tax between 2011 and 2012?”
First, on the issue of the extension. This only applies if you did not file your return by April 15, 2011 for the 2010 tax return. If you filed timely by this date, then you have until October 17, 2011 to recharacterize your ROTH conversion back to a regular IRA. However, if you are filing after April 15, 2011, then you must have timely filed an extension in order to still reconvert by October 17. You are not required to recharacterize all of the conversion amount. You can elect to do part or all and it must be in the form of a dollar amount. If you elect to reconvert the whole amount and there are no other ROTH IRA contributions in this account, it is fairly easy to accomplish this with your IRA trustee. However, if there are other ROTH contributions or you elect to reconvert less than 100% of the contribution, then you must perform a calculation of the earnings (or most likely losses) since the conversion and indicate to the trustee the net amount to be reconverted.
With regards to the last question, this reconversion will eliminate the chance to spread the income over 2011 and 2012, however, if the IRA has decreased dramatically in value, then it still may make sense to do the reconversion. This can be a very complicated calculation, therefore, we highly recommend that you review this with your tax advisor before making any decision.
If you have previously filed your return, then you will need to file an amended income tax return to let the IRS know how much you are reconverting back to a regular IRA. If you elected to pay this tax in 2010, then you will be entitled to a refund. If you elected to spread it out over 2011 and 2012, the amended tax return will simply clarify to the IRS how much is taxable in 2011 and 2012.