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Undo a Roth IRA Conversion
by Kevin McCormally

Are you among the unfortunate investors who converted a regular IRA to a Roth IRA last year and have seen the value of the account dwindle since the switch?

No matter: You still have to report the full amount you converted on your tax return -- and pay tax on it in your top bracket, even on the money that has disappeared.

Who was it who said life isn’t fair?

Fortunately, there's a way around this double whammy. You can undo the conversion -- using something the IRS calls a "recharacterization." Basically, you tell the IRA sponsor to put your money back in a regular IRA. If you do so, you don't have to report the original switch to the IRS. You actually have until October 15 of this year to undo a 2003 Roth conversion. But doing so before you file your 2003 return saves you the cost and hassle of having to pay tax now, then filing an amended return to retrieve it if you recharacterize later.

But you say you really want a Roth, with it's promise of tax-free withdrawals down the road? Well, you can re-convert the account to a Roth ... but you have to wait until 2005 to do so.