- Published: Monday, 18 September 2017 09:16
- Written by Raul D. Prieto, CPA
Converting a traditional IRA to a Roth IRA can provide tax-free growth and the ability to withdraw funds tax-free in retirement. But what if you convert a traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover that you would have been better off if you hadn’t converted it? Fortunately, it’s possible to undo a Roth IRA conversion, using a “recharacterization.”
Reasons to recharacterize
There are several possible reasons to undo a Roth IRA conversion. For example:
- You lack sufficient liquid funds to pay the tax liability.
- The conversion combined with your other income has pushed you into a higher tax bracket.
- You expect your tax rate to go down either in the near future or in retirement.
- The value of your account has declined since the conversion, which means you would owe taxes partially on money you no longer have.
Generally, when you convert to a Roth IRA, if you extend your tax return, you have untilof the following year to undo it. (For 2016 returns, the extended deadline is because the 15th falls on a weekend in 2017.)