In discussion with Kal Barson of the Barson Group on taxes issues, and the new rules that took effect in 2010 under the Tax Code, Kal pointed out that there are a number of tax planning tools that warrant consideration given the recent volatility in the financial markets. One such option is the concept of Roth IRA conversion “re-characterization”.
Conversions of traditional IRAs to Roth IRAs became popular with the elimination of income limitations. However, those conversions came with a tax liability since (generally) those transfers constituted a taxable event.
And especially now, with the recent troubles in the stock market, a conversion from a traditional IRA to a Roth IRA could leave you with a tax liability greater than the current value of the asset.
By example, presuming you converted a $250,000.00 traditional IRA to a Roth IRA in 2010 and the asset is now worth less, you could end up with $250,000.00 of taxable income for 2010 and an asset worth significantly less.
Fortunately, the tax code gives you an out in a form commonly referred to as "re-characterization".
In this relatively lesser-known aspect to the Roth IRA conversion, "re-characterization" is the process whereby anytime up to the due date for the filing of your tax return for the year in which you made the conversion, you can put the money back into your traditional IRA at its present value and avoid the taxable income issue referred to above.
To accomplish this re-characterization, you need to put back the amount that you converted, plus any gains, less any losses back into its original form. If the conversion took place in 2010, the "re-characterization“ must be accomplished by October 15, 2011.
Fortunately again, once "re-characterized", the tax code allows you to re-convert those funds back to Roth IRA at a later time.
If you have any questions about this topic, or any other family law related topics, please visit our website at www.diamondanddiamond.com, or to schedule a consultation with Richard Diamond, please contact us by phone at (973) 379-9292, or email us by clicking here.
**NOTE: The above blog discussion is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized legal, tax, tax planning, investment, or other professional advice. Always consult a qualified professional who knows your particular situation for advice on your taxes, your investments, the law or any other business and professional matters that affect you.
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