The actual taxation that is connected with an IRA rollover to Roth IRA is the big "negative" aspect of converting traditional retirement funds to a Roth IRA. But presumptively, you've determined you'll eventually profit from the benefits from the Roth as compared to keeping that money with your traditional IRA. If your converted funds take a dive in the market, it is possible to 'unconvert' your IRA rollover to Roth IRA to recuperate the tax a person paid.
Suppose an individual converted $150,000 of one's traditional IRA with a Roth IRA. Let's say you did that for the calendar year 2010.Then, because of a market downturn, your own converted retirement funds with your new Roth lose a lot of value in 2011. Let's say the $150,000 drops to $80,ooo. It's tough to take the fund's decline but especially challenging to have had to pay tax rates on the $150,000 IRA rollover to Roth IRA.
But if a person can 'unconvert' that transfer in time, you're back holding a regular IRA - possibly with only $80,000 value - then again you're no longer liable for the income tax on the $150,000 conversion you made. Later, if you still think an IRA rollover to Roth IRA is still a good idea, you are able to redo the the conversion process a then again pay income tax for the conversion of the $80,000 rather than the $150,000. Which means this 'reconversion' tactic can save you some significant IRA rollover tax dollars.
The rules for 'unconversion' which the IRS calls 'recharacterization are as follows :
If you complete an IRA rollover to Roth IRA , say in 2010 for the tax year 2010, you need to 'recharacterize' it by the extended due date of your taxes for the year. This would generally be as late as October 15, 2011 if you have applied for and acquired an extension. So you will have many months to see how your IRA rollover to Roth IRA performs before "finalizing" it (deciding not to reverse your conversion).
In addition, you may not convert the IRA Rollover to Roth IRA, then 'unconvert' that and reconvert the same individual retirement arrangement money in the same year . If you wait to 'unconvert' the particular Roth the next year, you need to still wait thirty days after the 'uncoversion' is completed before reconverting back to a Roth IRA.
Be sure to notify your trustees of both IRAs -- the original traditional IRA and your converted Roth IRA- before the reversal date that you want to be able to 'unconvert' (i.e. recharacterize) that will change Roth IRA back to a standard IRA. Let the trustees know:
- the dollar amount of the conversion for the Roth IRA to be recharacterized;
- the particular date you made the particular conversion and the tax year for which it had been made;
- any additional details needed to make the move, including the names of the trustees involved
You must additionally report the recharacterization of the IRA Rollover to Roth IRA on your tax return for the tax calendar year in which you made the main Roth conversion. Recharacterization, once finished, is irrevocable. IRA rollover to Roth IRA has great benefits and hopefully, you wont need the rechracterization process.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions