Reconvert An Existing Roth Account

Answer 1

Individuals whose annual adjusted gross income exceeds $100,000 can now contribute to a Roth account. This has prompted many to convert their traditional IRA in hopes that the Roth will yield a high return on investment. However, if the account fails to bring in a substantial amount of profit or loses its value, converting the account back to a simple IRA is easily accomplished. The main consideration when converting a retirement account is the taxable status of the contributions. All non-deductible contributions to a simple IRA are tax deferred, meaning they are treated as regular income if withdrawn. Unless the money is transferred to another shelter, the IRS will treat it as taxable. Those who have suffered a loss in value through their Roth account may want to recharacterize by performing a reconversion. This means that the value of the new IRA will be less than when the original investment was converted to a Roth, but the tax is once more deferred.

Contacting The Trustee

Those wishing to relieve themselves of a drain on their Roth investment need only contact the trustee of the account and have the funds dispersed. The taxable amount will be reported to the IRS, but reconverting the funds to a simple IRA will shelter the balance. Reconversion of an account must take place no later than the 15th of October of the year following the initial conversion. If a traditional IRA was converted in 2011, individuals have until October 15, 2012 to reconvert.

Reinvesting In A Roth Account

A poorly performing Roth account may prompt some to reconvert to a simple IRA, but the money can still be used to open a new Roth account at a later date. Recharacterizing an account results in a lower balance on the new IRA, but if this is later converted to a new Roth, the resulting tax hit will be significantly less. The federal government requires a 30-day waiting period for opening a new Roth account using reconverted funds. Also if an individual converts and then recharacterizes an account in the same calendar year, he or she must wait until January 1 of the following year to reopen or establish a new Roth account using IRA distributions.

Consulting A Tax Professional

A great deal of money can be lost in taxes to the federal government unless conversions are conducted properly. For many, converting funds and understanding what is taxable is confusing and can result in despair. It is usually in the best interest of the taxpayer to consult with a tax advisor before performing any sort of conversion to or from a Roth account.