A deadline is looming. Assuming you filed your 2010 income tax returns on time, you have until October 17, 2011, to recharacterize contributions to Roth IRAs as contributions to traditional IRAs. This deadline may be important to you if converted your traditional IRA to a Roth last year betting that the market would perform well and that you would, as a result, enjoy significant tax-free earnings in your retirement years, but are now having second thoughts.
Brief window to convert to Roth IRA
The October 17 deadline also applies to the recharacterization of contributions to traditional IRAs as contributions to Roth IRAs. If you are one of the fortunate few whose investments have done well and you are feeling confident about future market performance, you may want to take advantage of this brief window to convert your traditional IRA to a Roth.
Refund of taxes
If you do elect to switch from one type of IRA to the other, the IRS will treat both the recharacterized contributions and the income attributable to those
contributions as though they were in other type of IRA all along. For example, if you previously paid income taxes upon converting to a Roth IRA, you would get a refund of those taxes upon reconversion to a traditional IRA.
Contributions that do not qualify
Most, but not all, types of contributions can be recharacterized. Regular contributions to both Roth IRAs and traditional IRAs qualify, as do Roth conversion contributions. An example of a contribution that does not qualify is a tax-free rollover from one traditional IRA to another.
If you think you want to recharacterize your Roth IRA as a traditional IRA or vice versa, be sure to talk with your tax or financial advisor right away as the process can take some time to complete.