“Unconvert” Your Roth IRA rollover 2011 to Help Reduce Loss

Should you happen to perform a Roth IRA rollover 2011 and incur tax (by moving funds from a traditional 401k plan or traditional IRA) and then see your Roth IRA fall in value, you can undo the conversion.

The taxes that accompany the Roth IRA rollover 2011 is always a significant hurdle. Yet presumably, you've determined you'll ultimately gain more benefits from the Roth IRA than keeping that cash in your traditional individual retirement arrangement (we have covered those advantages in other posts). But if your converted account takes a dive in value because of a fall in the market, you can 'unconvert' your Roth IRA rollover 2011 to reclaim the tax owed for the conversion. In other words, IRS lets you go into the future and then reverse the past if the future does not turn out as you had hoped.

Consider this IRA rollover example. Suppose an individual converted $200,000 of one's traditional IRA to some Roth IRA. Then, as a result of market downturn, the converted funds within the new Roth loses a lot of value. Perhaps it declines to $120,000. It's tough to take the loss in wealth but especially difficult to have had to pay taxes on $200,000 for the Roth IRA rollover 2011.

But if you 'unconvert' by the due date, you're back again holding a traditional IRA - worth just $120,000 - but without owing the IRS any tax. If you still consider an Roth IRA rollover 2011 a good move, wait an watch what happens to your account for up to 21 months as you may decide to reverse the rollover.

Regarding 'unconversion' - which the IRS calls 're-characterization', here are the rules :

You may 're-characterize' your Roth IRA rollover 2011 up to the extended due date of your 2011 tax return, which is October 15, 2012. Therefore, you have a relatively long time to wit to see how your account performs before deciding if a recharacterization is beneficial
You may not make a Roth IRA rollover 2011, then 'unconvert' it then reconvert it again for the same tax year. If you 'unconvert' the Roth IRA rollover 2011 in 2012, you must now wait 30 days following your 'uncoversion' before reconverting to a Roth IRA.
Notify the trustees associated with both IRAs - the traditional IRA or 401k from which the funds originated as well as your converted Roth IRA trustee before the date of the desired unconversion (i.e. recharacterization). Let the trustees know:
- the amount of the actual conversion to the Roth individual retirement arrangement to be re-characterized;
- the date you made the conversion and the tax year to which it was assigned ;
- any additional information required to make the transfer, such as the names of the trustees concerned
You must also document the re-characterization of the Roth IRA rollover 2011 by filing an amended tax return for 2011.