For Questions and Orders, Call
1-866-937-7506
 

Can You Avoid Higher Roth IRA Taxes?

January 9, 2009 by Chase
Attn: Retirees – Yes, You Can Did you know you can switch your assets back to a more traditional retirement account if your Roth IRA isn’t holding value? It’s true, and CNN Money Magazine’s Walter Updegrave suggests the oft-overlooked tactic can be a smart move as our country looks toward what’s expected to be a long-winded recession complete with Presidentially-revamped taxes.

For example, Updegrave points out that your Roth IRA’s value could take a huge hit if the stock market drops drastically, in some cases marking down what was a $150,000 IRA to something closer to $100,000.

Aside from the initial hit of $50,000 you’d take, it will cost you more in taxes as well. A Roth IRA is taxed in the 28% bracket on what you contribute to the account, and that’s a tax that is based on the IRA’s value at the time of the conversion ($150,000 instead of $100,000). That turns out to be $42,000 taxed dollars you’d lose in addition to the $50,000 that was lost as a result of the dipped stock market.

By recharacterizing, which entails undoing that conversion and transferring the balance you had from your Roth back to your traditional IRA, you can save yourself a sizable portion of those taxed dollars because the IRS would only tax your $100,000 holdings rather than that $150,000 you previously held.

It’s important to remember that there are certain rules and regulations to the recharacterization process that you’ll need to keep in mind moving forward. According to Updegrave, “you can recharacterize a conversion anytime up to the income tax filing deadline for the tax year of your conversion, including extensions.”

In layman’s terms, that means that if you converted in 2008, you can take the mulligan as late as October 15 of this year. Then, you’ll have to wait until the next year begins before you can convert your holdings from your traditional IRA into a new Roth IRA again.

So is there any negative aspect to this opportunity? Of course: that ever-fluctuating stock market may recover and experience some steady growth, which would in turn raise your taxes accordingly.

Related Blogs