I converted my traditional IRA to a Roth last year, but I have since changed my mind about the conversion. Is it too late to switch it back to a traditional IRA and avoid the tax bill?
It’s not too late to undo a 2010 Roth IRA conversion. You have until October 17, 2011, to change the account back to a traditional IRA (technically called recharacterization) and get back money you’ve paid in taxes on the conversion or avoid paying the tax bill. Among the reasons to undo the conversion: The value of your investments decreased after you converted the account to a Roth and you don’t want to pay tax on the higher account balance, or you don’t have the money to pay the taxes you owe.
To undo a Roth conversion, contact your IRA administrator and ask to recharacterize the account back to a traditional IRA. If you already paid the tax bill, file an amended return (using Form 1040X) to get a refund. Or, if you had planned to split your tax bill between your 2011 and 2012 returns, as allowed by a special provision for 2010 Roth conversions only, you can avoid paying the tax bill by recharacterizing your Roth conversion before October 17.
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Keep in mind, however, that the special rule for spreading the tax bill over 2011 and 2012 only applies to 2010 conversions. If you reconvert the account to a Roth IRA this year, you’ll need to pay the tax bill when you file your 2011 taxes.
For more information about IRA conversions, see 7 Myths About Roth IRA Conversions and my Should You Convert to a Roth IRA? column. Also see IRS Publication 590, Individual Retirement Arrangements.
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