Here are some of the thing you need to know about “undoing” a previous RothIRA conversion.
1. What is a recharacterization?
traditional IRA to a Roth IRA (generally via a trustee-to-trustee transfer). It’s not an exact undo, however, where everything goes back to the way it was before and it is subject to a variety of restrictions. It’s more of a switch from one type of IRA to another.
2. How much can I recharacterize?
You can only recharacterize the same amounts you’ve rolled into a Roth IRA from one/more by transferring them into a (1) new or (2) existing traditional IRA but not back into the plan from which they were distributed.
3. When can I recharacterize?
After you have made a rollover from a traditional IRA into a Roth IRA you must wait at least you must wait at least 30 days (or up to a year, depending on the amount) until after that time point to reverse or recharacterize it. As for how long you can wait, it must be done during the year following the rollover or conversion. In short, a Roth IRA account holder with second thoughts has until October 15 of the tax year following the conversion to put the money back into a traditional IRA (unless the 15 falls on a Saturday or Sunday, in which case you have until Monday). If you have converted different amounts from different funds and are seeking to get all or part of those amounts back out of a Roth IRA, each portion of money is subject to the specified waiting period.
4. Do I have to have already filed taxes?
Yes you do – or have officially requested an extension. For instance, the deadline for recharacterizing rollovers done during 2015 and reported on your 2015 tax documents (filed on/before April 15, 2016) is October 15, 2016. [Note: This is not the deadline for filing the amended return, aka Form 1040X, to claim credit/refund.] If you have switched from a Roth IRA to a nondeductible IRA, you’ll need Form 8606.
5. If I filed for an extension does that move the dates out?
It does for the reporting but not for the act of recharacterization itself. Despite your tax extension, you must have completed the recharacterization of a 2013 rollover by October 15, 2014 for 2013. The deadline for filing the 1040X (for a credit/return) must then be filed by the later of these parameters:
- Three years (including extensions) after the date your original return was due, or
- Within two years after the date you paid the tax.
Because of the various complications, you’ll want to talk to a tax professional. Note that most custodian representatives are not qualified to provide tax advice.
Finally, remember to calculate both sides before undoing a conversion; if your investments lost value but your tax rate went up you may not see any benefit to a recharacterization.