October 2, 2000

News You Can Use
Deadline to Undo Roth IRA Conversion is October 16

The deadline to undo a 1999 Roth IRA conversion is October 16^th. If you converted a traditional IRA to a Roth IRA last year and wish to reverse conversion, roll the money back into a traditional IRA by the deadline. The IRS will then treat the IRA as though no conversion ever took place.

This re-conversion procedure was meant as an "escape hatch" for taxpayers who realized that, after converting their IRAs to Roths, their incomes exceeded the $100,000 eligibility limit. However, some people who still qualify for the Roth conversion may benefit from reversing the conversion, especially if their IRA portfolios have declined in value since the conversion.

For example, if Fred converted his $40,000 IRA to a Roth IRA, he must pay tax on the full $40,000, even if the IRA’s stock value drops to $30,000. If he reverses the conversion before the deadline, he will avoid the taxes and can then reconvert the IRA to a Roth at a later date. However, regulations require a minimum 30-day waiting period before repeating. Beginning this year, taxpayers will have to wait until the following tax year to convert a traditional IRA to a Roth if they reversed an earlier conversion.

Taxpayers who wish to reverse a conversion but have already filed a return before October 16^th will need to file an amended return.