Consider Recharacterizing Your Roth IRA
by James Lange, CPA, JD

On December 22, Bill Flanagan's column in the Pittsburgh Post Gazette quoted me on the subject of recharacterizing a Roth IRA. While what he wrote was correct, it only presented the first step of an overall strategy.

Bill has graciously informed me that he will follow through with the additional information in two subsequent columns.  The information below, similar to what appeared in our free email newsletter, provides you with the entire picture.

Assume that earlier in the year 2000 you converted a traditional IRA for $100,000 (or any amount) to a Roth IRA.  Since the time of the conversion, the stock value has plummeted to $70,000.  With this scenario you are stuck paying income tax on $100,000 for a Roth IRA currently worth $70,000.  Consider "unconverting" which would put you in a position similar to where you would have been if you had not made the conversion in the first place.  That is, you would have a traditional IRA with a value of $70,000 and no resulting tax liability from the conversion.  In prior years you were allowed to make a subsequent reconversion of the $70,000 to a Roth IRA, but that is now forbidden.

Then, and this is the critical next step, convert a different traditional IRA currently valued at $100,000 to a Roth  IRA.  With this strategy you will have a Roth IRA of $100,000 and a traditional IRA of $70,000.  Without the undo and do, you would have $100,000 in a traditional IRA and $70,000 in a Roth.

Bear in mind that you may have to reexamine the issue of your beneficiary.  I often recommend different beneficiaries for Roth IRAs and traditional IRAs.  With the converting and unconverting, if you had (or should have had) different beneficiaries, you may have to re-designate your choices.  If your integrated retirement and estate plan has the beneficiary for the traditional IRA the same as your beneficiary for the Roth, there is no change in the beneficiary designation is necessary.

The most important "immediate actions required before year end" are to unconvert the Roth you converted in the year 2000, which in light of the market fluctuations has likely decreased in value, and to convert a different traditional IRA to a Roth IRA.

For more information on the Roth IRA conversion, please click here.

For additional information on a continuing basis, please sign up for our complementary email newsletter.

James Lange, CPA, JD has a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financial Planning, Kiplinger's Retirement Report and The Tax Adviser.

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