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September 7, 2011

Should you reverse a 2010 Roth conversion?

With the stock market down, it may be appropriate to revers (recharacterize) a 2010 Roth Individual Retirement Account(Roth) conversion.  You have until October 17, 2011 to reveres a 2010 Roth conversion.
You paid tax in 2010 on the amount of the traditional Individual Retirement Account (IRA) that was converted in 2010.  If the current value of the Roth IRA is less than the amount converted you may want to recharacterize the conversion.  If you do recharacterize, you should amend the 2010 tax return.  The income from the conversion will be eliminated and you could receive a refund.  To be effective, the recharacterization must be done by October 17, 2011.
Next you will want to consider converting a traditional IRA to a Roth in 2011.  This will put you back to the position you were in before the recharacterization, but at a lower tax cost.  You must wait at least 30 days before you reconvert.  Depending on your view of the stock market, you may want to wait until closer to the end of the year. You will need to check with your tax return preparer to see what the tax savings are before proceeding.  Also check with the custodian to see how much time they need to complete the recharacterization by October 17, 2011.
Deadline Approaching for Unduing a 2010 Roth Conversion
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