Recharacterizing your 2010 Conversion from Traditional IRA to Roth IRA

We are writing to inform you that if you act by October 17, 2011, you have a last chance to “reach back” and change the nature of IRA contributions (including conversions to Roth IRAs) you made for the 2010 tax year. This works as long as you filed your 2010 return by April 18, 2011, or got a filing extension and filed your return by the extended due date.

You have until October 17, 2011 to complete a “reversal” of an earlier conversion to a Roth IRA.

  • If you converted funds from a traditional IRA to a Roth IRA for the 2010 tax year, you can “undo” the conversion—in effect, it’s as if the funds never left the traditional IRA.

You may want to recharacterize a 2010 conversion to a Roth IRA for one of many reasons. For example, you may have converted a large sum from a traditional IRA to a Roth IRA and now regret having done so because of the tax bill generated by that move. Another possibility is that you may have made your traditional-IRA-to-Roth-IRA conversion when your traditional IRA’s investment portfolio stood at a very high valuation, and has since dropped to lower levels. The recharacterization mechanism allows you to treat the taxable conversion as if it had never been made.

Considerations and Variables in making a decision to recharacterize:

There are a number of variables that come into play in deciding if a recharacterization should be considered for your individual situation.  Some of the considerations and variable are as follows:

  • Estimation of future tax rates
  • Changes in the future tax law
  • Expected future investment returns
  • Time until money will be drawn for retirement
  • The drop in value since the original conversion
  • The total amount of money converted
  • Estate planning considerations
  • Cost to prepare amended tax returns
  • Liquidity to pay the taxes on a prior conversion
  • Potential to “reconvert” in the future

Time is of the essence in regards to making this “reversal” of the 2010 conversion to a Roth IRA.

Please contact us as soon as possible, to ensure there is time to re-examine your 2010 Roth IRA Conversion and act before October 17, 2011.

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