Should I choose a Roth IRA or not? That’s the big question. Should I pay taxes upfront or risk future tax troubles? In 2011, the question might be whether to change my decision on the Roth IRA. Can it be undone? It’s important to understand the rules for recharacterizing a Roth IRA in case it’s necessary. Converting a traditional IRA to a Roth IRA means taking money out of the traditional IRA and putting it into a Roth IRA. This will be taxed as regular income. If you made after-tax contributions to your traditional IRA, those won’t be taxed again when you convert. For conversions in 2010, there are different ways to report and pay the taxes on the money you moved. You have to make a choice on your tax form. After 2010, the tax has to be paid all at once. Remember to fill out Form 8606 and make the right choice for your situation. If you want to change a conversion of your retirement savings from one type of account to another, you have to do it by the deadline for filing your taxes. It’s important to pay any taxes on the conversion on time to avoid penalties. If you’re not sure if you need to pay the full amount, it’s better to pay it and then get a refund later if you paid too much. If you converted your account in 2010 and are spreading out the tax payments over two years, you have to decide if you want to change the conversion before the tax payment deadline. This way, you’ll know how much tax you owe for each year. If you converted your traditional IRA to a Roth IRA in 2010, you may need to recharacterize if the value of your Roth IRA has gone down and you don’t want to pay taxes on the higher value. You can only do this by transferring the money from your Roth IRA back into a traditional IRA. The reason for doing this is to save money on taxes if the tax rates have decreased, or if the value of your account has gone down. It’s like getting a do-over for your retirement savings. In 2011 and 2012, the tax rates stayed the same, so that’s not a big deal for recharacterizing. The main reason to think about recharacterizing is if the money in the Roth IRA goes down in value. But be careful because it costs money to recharacterize and you can’t change your mind too many times. If you convert your IRA to a Roth IRA and then the value goes down, you can change it back to a traditional IRA, but you might have to wait before you can change it back to a Roth IRA. It’s important to know the rules and work with a financial advisor to make the best decision. For example, if you convert in January and the value goes down by June, it might be best to wait until November before deciding whether to change it back. This way, you can see if the value goes back up before making a decision. To make the most of Roth IRA accounts, it is recommended to have multiple accounts with different types of investments. This way, if one account underperforms, it won’t affect the others. It’s also suggested to convert more assets than needed and spread them across multiple accounts, so you can recharacterize the ones that don’t perform well. If you didn’t separate your investments initially, you can still use the recharacterization rules to restructure your holdings. It’s important to consider your overall financial situation and deadlines for recharacterization. Talk to your financial planner to make sure you’re using this strategy effectively. The Taxpayer Relief Act of 1997 added a new rule for retirement savings accounts, allowing people to convert some of their traditional IRAs into Roth IRAs. This change was later updated in 2005 to remove the income limit for conversions and allow married people filing separately to convert as well. It’s important to understand the rules for contributions, conversions, and withdrawals from Roth IRAs. If you made a mistake in converting money from a traditional IRA to a Roth IRA, you can undo it by recharacterizing the conversion. You have until the tax filing deadline to do this. If you miss the deadline, you might be able to get an exception through a private letter ruling. If you’ve already filed your taxes, you can amend your return to reflect the recharacterization. You’ll need to notify the trustees of the plans involved. This passage discusses the rules and considerations for converting a traditional IRA to a Roth IRA and then possibly changing it back again. It also mentions strategies for managing assets within a Roth IRA. This article provides general information about ideas and strategies for managing wealth. The authors work at a bank and have degrees in law and tax. The views expressed are their own and not necessarily those of the bank. This article is submitted on behalf of the Tax Section of The Florida Bar.
Source: https://www.floridabar.org/the-florida-bar-journal/roth-ira-recharacterizations-its-2011-now-what/
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