Don't Mess With Taxes

Did you convert your traditional IRA to a Roth last year? Are you having second thoughts as you watch the markets stumble, leaving you with a big tax bill on a no longer very big retirement account balance?

Then you have a chance to change your mind.

You can undo your IRA conversion. It's known as a recharacterization.

But you have to do so by Oct. 17.

And there are some things you need to think about before you decide on an IRA do-over:

1. Figure your recharacterization amount.
2. Time your move.
3. Think long term.
   
4. Consider the two-year tax deal.

These are detailed in my story 4 Roth recharacterization considerations, but I want to highlight one here, too.

Remember that when you converted your traditional IRA last year, you automatically got two years to pay the tax due on that money.

Half of your tax on the converted amount will be included in your 2011 return, filed in 2012. The other half will come due on your 2012 taxes, filed in 2013.

Spreading out the taxes sure makes the conversion bite easier.

But if you recharacterize your Roth back to a traditional IRA and then decide later to give the no-tax-on-distribution IRA another shot, you'll have to come up with all the conversion tax money at once.

I'm not saying that you should keep the Roth just because you get two years to pay the taxes. But I am saying be sure to take this into account when making the decision.

You also might find these items of interest:

• Roth IRAs and your retirement income
• Handy retirement plan rollover chart
• 2010-2011 retirement plan contribution rules, limits