You Have ONE Day to Recharacterize Your IRA…

October 14, 2009

My Charles Schwab friend sent me the following email (adjusted slightly because I received it two days ago).



Two countdowns, one problem: Nobody knows about them.

1. In 73 days, the 2010 Roth conversion opportunity will go into effect, allowing people earning over $100,000 to convert to a Roth IRA and enjoy tax breaks down the line.

2. In just 1 day, on October 15, we reach the deadline for Roth conversion take-backs: if you already switched to a Roth in 2008, you can undo the move (“recharacterize”) and convert your Roth IRA back to a traditional IRA, shrinking your overall tax bill and returning taxes paid with interest.

Schwab’s latest survey found that those most impacted by the 2010 change…

• don’t know about the 2010 Roth conversion rule changes (61 percent),

• are confused about the rules (26 percent find it more confusing than health reform),

• are not planning to convert (72 percent).

I kind of fell down on the job on this recharacterization stuff. For those of you who aren’t sure about recharacterization, it’s the process of reversing the conversion of a traditional IRA to a Roth IRA. I was going to explain the process in a post but I really can’t do a better job than was done in this article.

3 responses to You Have ONE Day to Recharacterize Your IRA…

  1. We converted a traditional IRA (that was a 403(b) rollover) to a Roth IRA in 2008, however when we did out taxes it was amazing what happened and quickly had to reverse it. I knew that we would have to pay taxes as “income” on the amount converted. What I didn’t realize, was this was going to count towards our 2008 income amount thus eliminating some of the tax breaks we were getting. We are in a very low tax bracket due to income and 2 kids.

    I understand we never paid taxes on the money and should pay them on the conversion. It just seems wrong to count it towards your yearly income when its really not “income” as you can’t touch it without penalties and extra taxes. Its almost as if they are including the penalties and extra taxes by taking away some of your other tax breaks due to your new “income” level.

    I decided to just keep that amount taxable and we’ll just contribute to a Roth from now on.

    Is this too short sighted? Am I missing something?

  2. Re: Doug W,

    What would you like the IRS to do? If it should not be income in 2008, what should it be? You are switching to a Roth and thus you will not pay taxes when you take the money out down the road, so when do you think the IRS should get their tax money if not in the year you convert?

    Now with the 2010 conversion they are allowing people to pay over 2 years. Is this what you wanted?

  3. I’m not complaining so much about paying the taxes (because I vote my feelings on that!), but I am complaining because it effects my current income that I am living on. In essence it is raising my tax bracket for money that I cannot use as income.

    Example, if I make 45k but I live off of 35k so I can invest 10k into retirement. Then I decide the next year to convert to a ROTH, the government is saying oh wow you made 55k this year. So yes, it may have reduced my taxable income by 10k the first year, but the 2nd year I increased by 20k. It doesn’t make sense, you should stay at the same level of “income” and pay a flat rate based on that.

    Does that make more sense? It is really confusing stuff anyways.