When you convert a traditional retirement account to a Roth IRA, you have until October 15 of the following year to undo that conversion using a recharacterization. Normally this is advantageous if the account suffered a significant decline in value between the date of the conversion and the date you pull the recharacterization trigger. Recent stock market turbulence may leave a fair number of people in a position where they should consider this action.
Looking back over the last 20 months, though, the stock market overall is still up relative to where it was during much of that period. Stocks may seem to be performing poorly because they’re down from recent highs. Chances are, though, if you converted in 2014 and invested your Roth according to sound investment principles, including good diversification and low expenses, the account would be looking reasonably good relative to where it was when you converted, even if you’re disappointed relative to where it was several weeks ago.
Nevertheless, there are sure to be people whose accounts have lost enough value to justify undoing the Roth conversion so it can be done again at a lower tax cost. here are the key points.
You can’t redo a Roth conversion immediately after you undo it. This is why you probably shouldn’t undo it when the decline in value is relatively small. There’s a risk that the account will recover during the waiting period so that you end up reconverting at an even higher tax cost.
The waiting period is until the later of these dates:
- The first day of the year after the year in which the original conversion took place, or
- The 31st day after the recharacterization.
Right now we’re talking about undoing a conversion that took place in 2014, so the relevant waiting period is 30 days.
Bear in mind, however, that this would bring you into early or mid-November. When you’re that close to the end of the year, it often makes sense to delay a Roth conversion until the beginning of the next year. This added wait increases the risk that your investments will rise in value, increasing the cost of a reconversion, but it produces two benefits. You get to delay paying tax on the conversion for another year, and you also extend for another year the deadline to consider undoing this new conversion.
Qualifying for the October 15 deadline
If you filed for an extension to file your 2014 income tax return after the usual April 15 date, your deadline for recharacterizing a 2014 Roth conversion is October 15, 2015. If you filed your 2014 return by the April 15 deadline without requesting an extension, you need to obtain an extension of the deadline for undoing a Roth conversion. Fortunately this extension is automatically granted if you follow these procedures:
- Prepare an amended return (Form 1040-X) reflecting any changes required by the recharacterization, including, if necessary, a new or amended Form 8606.
- Write “Filed pursuant to section 301.9100-2” at the top of the return and file it where you filed the original return.
Further details on recharacterizing Roth conversions appear in chapter 23 of our book, Go Roth!