Changing your Roth IRA back to a Traditional IRA

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Changing your Roth IRA back to a Traditional IRA

Named for Senator Roth (R-Del.), the new Roth IRA does not allow a deduction when contributions are made, but allows tax-free withdrawals of both contributions and earnings. Thus, unlike regular IRAs, which only defer taxes, the Roth IRA allows the tax-free accumulation of wealth. If the Roth IRA account has been established for five years and (1) the owner is at least age 59, (2) the owner is deceased or disabled or (3) the distribution will be used for first-time homebuyer expenses
The ability to “unconvert” or reverse a Roth IRA conversion provides the key to identifying which IRA assets you might opt to convert to a Roth and the key to saving taxes. Technically, the correct term is to “recharacterize” a Roth IRA back to a traditional IRA.

First we need to understand the regulations governing recharacterizations. Then we will provide several examples of situations that can take advantage of those regulations.

Rules Governing Recharacterizations

The IRS permits IRA owners to recharacterize Roth IRA contributions from one type of IRA (i.e. Roth or traditional) to the other. This applies to both the ordinary annual contributions and the conversion contributions. The deadline for recharacterizing a contribution or conversion is the extended due date of your tax return for the year of contribution or conversion. This would normally be April 15 following the year of contribution or conversion, or October 15, of this subsequent year if you have filed for and obtained an extension.

There are also rules limiting the frequency of conversions, recharacterizations, and reconversions. You may not make a Roth conversion, “unconvert” it and reconvert the same IRA money in the same year. Even if you straddle different calendar years, you must still wait 30 days before reconverting a Roth IRA that you had previously converted and “unconverted.”

Procedure for Recharacterizing a Converted Roth IRA Back to a Traditional IRA

Notify the Trustees of both IRAs involved on or before the transfer date that you want to “unconvert” or recharacterize a particular Roth IRA as a traditional IRA. If the person making the conversion dies before notifying the Trustees, the executor, administrator, or other person responsible for filing the decedent’s final tax return can notify them.

The notification must contain the following information:

• the type and amount of the conversion to the Roth IRA to be recharacterized;
• the date on which the conversion was made and the tax year for which it was made;
• a direction to the trustee to transfer, in a trustee-to-trustee transfer, the amount of the conversion and any net income allocable to it to the trustee of the recipient IRA; and
• any additional information needed to make the transfer, including the names of the trustees involved.

If both of your IRAs are maintained by the same trustee, simply redesignating the first IRA as the second IRA will be treated as a trustee-to-trustee transfer. You must also report the recharacterization on the tax return for the tax year in which you made the original Roth conversion.

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