Net Worth Advisory Group in Salt Lake City, Utah, Provides Tips on Roth IRA Recharacterizations

Oct. 5, 2011 - PRLog -- In 2010, many people took advantage of law changes enabling them to convert their traditional retirement accounts to a Roth IRA. The intention was to pay taxes on those retirement dollars in 2010 and enjoy tax-free growth going forward.

While this is likely still a sound strategy, the recent market downturn may provide a less expensive opportunity to do this. Consider the example of an individual in the 25% Federal tax bracket who converted $100,000 of retirement funds to a Roth IRA in 2010. In doing so, this investor paid $25,000 in taxes so that all future earnings in the Roth account would grow tax-free.

Now suppose this investor’s current account value has dropped to $80,000 during the volatile market we’ve experienced. An investor might argue that it was unfair to pay taxes on $100,000 of income when the asset is now only worth $80,000. Believe it or not, the IRS is willing to agree.

By recharacterizing the 2010 Roth conversion, both the investor and the IRS can pretend that the 2010 Roth conversion never took place. Essentially, the investor is converting the Roth dollars back into a traditional IRA account where taxes are again deferred and it’s like the Roth conversion never happened.  This eliminates the tax bill that was created by the original Roth conversion.

As most people have already filed their 2010 tax returns, they will need to file an amended 2010 return in order to eliminate the reference to the Roth conversion and receive a refund of any unnecessary taxes paid.

What if the investor still prefers the tax-free treatment a Roth IRA provides? Amazingly, the IRS provides an opportunity to still take advantage of these great investment vehicles. After 30 days have passed since the individual recharacterizes his Roth account back to a Traditional IRA account, the investor can against convert the funds back to Roth dollars. What is the advantage of this? Now the investor is paying taxes on $80,000 of income rather than $100,000. Assuming the taxpayer is still in the 25% Federal bracket, the tax bill would now be $20,000. Thus, by recharacterizing and re-converting, the individual lowered their tax bill by $5,000!

The small hassle of this process may not be worth it if the tax savings will only be a couple hundred dollars. However, if you’re due to lower your cost by thousands of dollars, it is definitely something you should look into.

If you converted retirement funds to a Roth IRA last year, speak to your financial advisor to determine if you might be able to reclaim any unnecessary taxes you have paid. Notice: applications for Roth recharacterizations are due October 17th.

To learn more about Net Worth Advisory Group visit http://networthadvice.com.

About Mr. Jefferies

Lon Jefferies is an investment advisor with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a member of the National Association of Personal Financial Advisors (NAPFA) and a CFP™ certification. He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is a platinum expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the Wall Street Journal, the NY Times and Investment News.

Contact Info

View Lon's blog at Net Worth Advisory Group's home page at http://networthadvice.com. Lon can be emailed at lon@networthadvice.com, or phoned at (801) 566-0740.

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Fee-Only Financial Planner
Net Worth Advisory Group
6975 Union Park Center, Suite 465
Midvale, UT 84047