You can reverse a 2010 Roth conversion. Then it's like the conversion never happened, which means the inflated conversion tax bill disappears.
Are you still reeling? August was a tumultuous money month (to say the least), but at least we can breathe a sigh of relief that it’s over. Hopefully the upcoming months will bode better.
The S+P downgrade and the following correction, as well as several other market drops, hit and hurt a lot of people. Of course, if your Roth IRA was hit then you’ve also got a bit more work to do to protect yourself. As a recent SmartMoney article details, you can still un-do a Roth IRA rollover from 2010, at least until October 17, that is.
Many people rolled over into Roth accounts in 2010, as recent rules allowed Americans of all incomes to do so. Why did they do so? Well, the Roth IRA can be a powerful income source in retirement or even a tool for estate planning purposes. This is because you pay the tax up front and no tax at the time of withdrawal. That is why the Roth IRA is so special.
Problem 1: With the recent market volatility, perhaps you have lost your shirt (and your socks) on your investment accounts, including your recently converted Roth IRA. Problem 2: Now you are facing a larger tax bill due to your Roth IRA conversion and you have even fewer spare dollars to foot the bill.
Good news: Before it’s too late, “re-characterize” your Roth IRA accounts and, by so doing, at least save yourself from the tax burden and live to fight another day. Read the SmartMoney article and share it with your similarly situated family members and friends.
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Reference: SmartMoney (September 7, 2011) “Should You Reverse That Roth Conversion?”