Tax Alert | August 19, 2011 Recharacterization of 2010 Roth Conversion Background: With the expiration of the $100,000 AGI cap on eligibility to convert a regular (either deductible or nondeductible) IRA account to a ROTH IRA, many taxpayers converted traditional IRAs to ROTH IRAs during 2010. Taxpayers will pay the tax due on the conversion in 2011 and 2012, or if they elect to do so, in 2010. Planning Opportunity: Some taxpayers have now decided that they would like to unwind the 2010 ROTH conversion. Due to changes in market conditions, the value of the converted ROTH IRA assets may be less than at the time of conversion. In other instances, the taxpayer's financial situation has changed and the funds to pay the tax are no longer available. A change in a taxpayer's personal circumstances also may make the ROTH conversion less desirable. Who is Eligible? The recharacterization election can be made only if the trustee-to-trustee transfer from the first (distributing) ROTH IRA to the second (receiving) regular IRA is made on or before the tax return due date (including extensions) for 2010, the year of the conversion. This means that the reconversion must occur by October 17, 2011. Tax Returns: Individuals who have already filed their 2010 tax returns will report the reconversion on an amended return for 2010. The amended return does not need to be filed by October 17 (the extended due date for 2010 returns), although October 17 is the deadline for making the reconversion. An executor or administrator may elect to recharacterize a ROTH conversion on behalf of a decedent. Individuals whose returns have been extended (and not yet filed) will simply not report the original conversion on the return when filed. Reconversion Requirements: Taxpayers must notify both the trustee of the ROTH IRA (first IRA) and the new regular IRA (second IRA) of their desire to recharacterize the original conversion. The contribution (regular or conversion) originally made to first IRA, plus net income (if any) allocable to the contribution, must be transferred from the first IRA to the second IRA via a trustee-to-trustee transfer. Any income is treated as having been earned by the second IRA (the transferee IRA). The trustee-to-trustee transfer must be made on a timely basis. The recharacterization election is irrevocable. 2011 Dixon Hughes Goodman LLP | dhgllp.com Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the Internal Revenue Code or applicable state or local tax law or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Tax Alert | August 19, 2011 An IRA owner who converts an amount from a traditional IRA to a ROTH IRA and then transfers that amount back to a traditional IRA by means of a recharacterization may not reconvert that amount from the traditional IRA to a ROTH IRA before the beginning of the taxable year following the taxable year of the conversion or, if later, the end of the 30-day period beginning on the day of the conversion. Contributions: If any contributions were made to the ROTH IRA after the 2010 conversion, these contributions (and any related income) are considered to be attributable to the second IRA upon reconversion. If a taxpayer made a ROTH contribution to a ROTH IRA after conversion in 2010, the contribution becomes a contribution to the regular IRA (the second IRA) as of the date of the original contribution to the first IRA when the taxpayer recharacterizes the ROTH IRA in 2011. Example: Susie converted her traditional IRA, worth $100,000 to a ROTH IRA in 2010. The value of Susie's ROTH IRA dropped during 2010 and 2011 to $70,000. Because of the drop in value of her ROTH IRA, on October 13, 2011, Susie notifies the trustees of both the ROTH IRA and her new regular IRA (to receive the ROTH funds) that she wants to recharacterize her ROTH conversion to a regular IRA. If Susie’s return were extended, Susie would not report the conversion on her 2010 return when it is filed and she would not pay tax on the original $100,000 conversion. If Susie had already filed her 2010 return before the reconversion, she would file an amended return to remove the original conversion from her taxable income for 2010. Because Susie still thinks that a ROTH conversion is a good idea, she still wants to convert the $70,000, now in a regular IRA, to a ROTH IRA. Susie is eligible to make this conversion on November 13, 2011, which is 31 days after the recharacterization. Susie does not have to wait until 2012 to make the conversion to a ROTH because 2010 was the year of the original conversion, 2011 is the year after the conversion, and 30 days is the longer period. For further information, please contact your Dixon Hughes Goodman tax advisor or Mary Fischer at firstname.lastname@example.org. About Dixon Hughes Goodman: With more than 1,700 people in 30 offices in 11 states and Washington, D.C., Dixon Hughes Goodman is the largest certified public accounting firm based in the Southern U.S. and the 13th largest in the nation. In addition to comprehensive accounting and advisory services, the firm focuses on eight major industries and serves clients in all 50 states. Visit www.dhgllp.com for more information 2011 Dixon Hughes Goodman LLP | dhgllp.com Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the Internal Revenue Code or applicable state or local tax law or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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