- 1). Decide that you wish to undo your Roth conversion. This is a step you should take seriously. The main reason to undo a Roth conversion would be if the market has had a substantial decline and you will face paying taxes on an account that has declined in value. If you plan to redo the conversion, your goal will be that the market stays in decline until you reinvest the funds in the new Roth IRA account.
- 2). Determine that there is still time left in the tax year. To be able to undo a Roth conversion, the process must be completed in the same tax year as the Roth conversion took place. If you made the conversion on June 15, 2008, you would have until April 15th, 2009 to undo the Roth conversion. (This is extended to October 15th of 2009 if you file for an extension on your taxes.)
- 3). Obtain your paperwork from the original Traditional IRA. You need to know where the Traditional IRA was held and the old account numbers, if possible. For example, you may have had a Traditional IRA with T Rowe Price, with an investment in mutual funds.
- 4). Get all of the paperwork together for your new Roth IRA. You'll once again need account numbers and contact information for the company.
- 5). Undo the conversion by transferring the funds from the Roth IRA back to the Traditional IRA. Contact both companies and let them know you wish to undo the Roth conversion, placing the funds back into the Traditional IRA. If it happens that you simply transferred the same account from a Traditional IRA to a Roth IRA with the same company, there will be fewer steps involved.
- 6). Realize the tax savings. If you converted $10,000 to a Roth IRA, you would have to pay $2,500 in taxes if you're in the 25% tax bracket. However, if you convert the money back to the Traditional IRA, you won't owe this money in taxes.
- 7). Decide to reconvert the traditional IRA to a Roth IRA. If you undo the Roth conversion, you must wait until the new year to reconvert the funds. If your transfer back to the Traditional IRA occurred on September 15, 2008, you have to wait until January 1, 2009 to redo the conversion. However, if you undo the Roth conversion in June of 2009 for a 2008 Roth conversion, you only have to wait 30 days to redo the conversion.
- 8). Understand the tax consequences of the whole process. In Step 6, you would have owed $2,500 in taxes. If you undo the conversion and then redo the conversion, you'll only owe taxes on the amount of money you convert the second time. For example, if the Roth IRA value had declined to $6,000, and you transferred $6,000 back to the traditional IRA, when you reconvert, you'll only pay taxes on $6,000. This would amount to $1,500. You have saved yourself $1,000 in taxes.
SHARE
