Recharacterize: Should you do it?

Congress has expanded conversion and rollover options for IRAs. Beginning January 1, 2010, taxpayers with adjusted gross income in excess of $100,000 can convert a traditional IRA to a Roth IRA. A Roth Ira has substantial benefits: Income from a Roth IRA is tax exempt and there are no minimum distributions at age 70 1/2. The conversion can be accomplished through a trustee-to-trustee transfer, a rollover or account redesignation.

The converted amount less any after-tax contributions must be included in gross income. If the rollover is accomplished in 2010, the income is reported on the individual’s tax return in equal installments over 2011 and 2012. Taxpayers can elect to include the entire amount in income in 2010. Given the projected increase in tax rates, taxpayers may want to consider including the entire amount in income in 2010.

Taxpayers have until October 17, 2011 to recharacterize a 2010 rollover or conversion to a Roth IRA. Recharacterizing an IRA contribution involves transferring amounts previously converted to a Roth or traditional IRA to an IRA of the opposite type. Therefore, a taxpayer is not committed to a decision to reconvert to a Roth IRA. A taxpayer may recharacterize conversions that decrease in value.

With questions or for more information, please contact a Simons Bitzer Tax Specialist at (317) 782-3070. Visit www.SimonsBitzer.com.