Recharacterize & Reconvert a Losing Roth IRA

This money hack will apply to a very small subset of individuals but, given the performance of the market, you could save a lot of money in taxes by doing this. If you converted your Traditional IRA to a Roth IRA last year (2007) and your Roth IRA lost value, you can “recharacterize” the conversion back to a Traditional IRA, wait a month, then convert again so that the cost basis of the conversion is lower.

Let’s say you converted the $100,000 in assets in your Traditional IRA into a Roth IRA. If you were in the 25% tax bracket, you’d owe $25,000 on the conversion. Let’s say that in the last six months, the Roth IRA dropped from $100k to $75k. If you qualify, you can recharacterize the Roth IRA back to a Traditional IRA, wait the required time, and then reconvert. You would save taxes on the $25k loss, or about $6,250 in taxes.

If you recently did this, talk to your financial professional to see what your options are and if you qualify.

Related Posts:

• 2010 Traditional IRA Conversion Loophole