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Wilmington CPA Tax Accountant Discusses Roth IRA Conversion Recharacterization: Undo

CPA and Tax Accountant Firm in Wilmington NC

Gary Bode, CPA: there could be reasons to change your mind about a Roth IRA conversion, and, the IRS lets you do so through recharacterization

Roth IRA conversions are a hot issue as IRS Form 1040 tax preparation time draws closer here in wonderful Wilmington NC.

“But what if you change your mind about a converted Roth IRA?  The IRS lets you undo your decision through recharacterization.  Please find the specifics below.” 
Gary Bode, Wilmington NC CPA and Tax Accountant

General Roth IRA Background

Traditional IRA contributions are tax free when contributed, but taxable upon withdrawal.  Once contributions are in the traditional IRA, there is an additional 10% tax on distributions if withdrawn before age 59 1/2, and penalties if minimal distributions aren’t made by age 70 1/2.

The IRS sets limits on traditional IRA contributions: $5000 per year if you’re less than age50, $6000 per year if you’re over 60.  If you make excess contributions, there is a nasty surprise upon IRS Form 1040 tax preparation: a 6% excise tax on the excess contributions! So Roth IRAs were created in 1989 to allow more annual contributions than traditional IRAs allowed.  Roth IRA contributions are made with after tax dollars and the basis is thus tax free upon distribution. 

What has your CPA done for you lately?

Why are Roth IRA Conversions so Popular now?

This year the IRS is having a two prong “Sale” on Roth IRA conversions.  First, the income cap restrictions are lifted, so everyone with a traditional IRA is eligible to convert.  Next, the tax upon the conversion can be paid over two years; in fact, you must make an election to pay it all in one year.

Does it make sense to Convert Roth IRAs?

It depends—hopefully clients seek proactive CPA advice instead of just jumping on the bandwagon. It is a multifactorial calculation which has personal preference components. 

Undo: Opportunity for Changing your Mind—Roth IRA Conversion Recharacterization

  • You generally have until October 15th of the following year to change your mind.  But you have to file IRS Form 1040 on time, or at least file IRS Form 4868 on time to extend the filing date.  This date may be further extended with an IRS Private Letter Ruling.
  • Recharacterization must be a trustee-to-trustee transfer.
  • If you with held money from the traditional IRA to pay the conversion tax, that amount can’t be undone.
  • Certain information has to be included with the Trustee notification.
  • Beware of institutional fees!

Why would you Recharacterize?

  • Maybe you thought the tax rates were going up, but they didn’t.
  • Maybe the value of the Roth IRA dropped by IRS Form 1040 filing time and you don’t want to pay income tax on non existent assets.
  • Maybe the overall tax savings weren’t there in your specific application.
  • Maybe you didn’t have the cash to pay even half the tax due to the Economy.

If you’d like a free initial consult with a Wilmington NC CPA and tax accountant, please consider calling us at (910) 399-2705.   We are a Wilmington NC CPA accounting firm serving the greater Southeastern NC area—primarily New Hanover, Brunswick, and Pender counties.

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