Taxpayers generally have until October 15, 2009, to recharacterize (undo) 2008 Roth conversions. This may be particularly helpful for clients whose IRAs experienced especially large losses due to last year's market declines. A recharacterization allows your clients to treat a Roth conversion as if it never occurred. Individuals would also want to recharacterize if they converted in 2008, and later found they weren't eligible to convert because their 2008 income exceeded $100,000.
If your clients recharacterize a Roth 2008 conversion in 2009, they'll be able to reconvert the traditional IRA to a Roth after waiting at least 30 days following the date of the recharacterization. Also, if your clients reconvert in 2010, there won't be any income limit, and they'll be eligible for the special 2010 conversion rule that allows them to report half of the conversion income on their 2011 tax return, and the other half on their 2012 tax return.
Example: Mary converted a $100,000 traditional IRA to a Roth IRA in June, 2008. Mary filed for a federal income tax extension, giving her until October 15, 2009, to file her 2008 federal return. Mary's IRA is currently worth only $60,000--it has lost 40 percent of its value. Nevertheless, Mary must pay income taxes based on the conversion date value of $100,000. Mary has until October 15, 2009, to recharacterize her conversion, and avoid paying federal income taxes on the $100,000. (If Mary has already filed her 2008 income tax return and paid the taxes on a timely basis, she can file an amended return for a refund as long as she recharacterizes the conversion by October 15.) Mary can again convert her traditional IRA to a Roth IRA after waiting 30 days from the date of the recharacterization.
The 360 Degrees of Financial Literacy Web site offers general information for managing personal finances and does not recommend specific financial actions. For financial advice tailored to your situation, please contact an expert such as a CPA or a personal financial advisor.