Tax planning and compliance for investors
Free Online Guides
By Kaye A. Thomas
Updated January 24, 2008
You can undo certain Roth IRA transactions until October 15 of the following year, even if you did not file for an extension.
If you made a mistake on a Roth IRA — for example, doing a conversion when you didn't qualify, or maybe just when it turned out not to be a good idea — the rules allow you to recharacterize your conversion or contribution. The deadline for action is your tax return due date, with extensions. That means that if you file for an extension to August 15, and a second extension to October 15, you have until October 15 to recharacterize a contribution or conversion for the preceding year.
There's a special rule you can use to recharacterize your contribution or conversion until October 15 even if you filed your tax return by April 15 without requesting an extension.
There's a little-known regulation that says you can always get a six-month extension — automatically, without asking permission from the IRS — for any election that can be made on an extended return. The extension runs for six months from the original, unextended due date of the return. For all the people who file by April 15, the deadline is October 15. You can make the election by this date even if you don't extend your return. Recharacterizing a Roth IRA is an election that can be made with an extended return, so the regulation applies.
There's just one eligibility requirement: you have to file your return on time. That means either you filed by April 15, or you filed a timely extension and filed your return within the extension period. If you blow your return deadline, you also blow your chance to use this generous rule.
To take advantage of this rule, you need to take all the steps that would have been required if you had done a recharacterization during the year. Then, if you've already filed the return without reflecting the recharacterization, you should file an amended return on Form 1040-X. The amended return should reflect any changes required by the recharacterization, including, if necessary, a new or amended Form 8606. Write "Filed pursuant to section 301.9100-2" at the top of the return and file it at the same place you filed the original return.
Through the private letter ruling process, the IRS has granted an even longer extension to some taxpayers. They won't do this simply because you changed your mind about the conversion, or because your Roth IRA suffered investment losses. You'll probably have to show that the transaction you're trying to undo never would have happened in the first place except for an honest mistake, and that you took steps to correct the problem promptly after it was discovered.
This is your choice of last resort for undoing a bad conversion. For one thing, the IRS isn't required to grant your request. In any event the process is expensive and time-consuming. Expect to pay a hefty filing fee in addition to any professional fees, and plan on the entire process taking months to complete.
|That Thing Rich People Do||The fastest, easiest way to learn the principles of investing.|
|Our complete guide to Roth IRAs and Roth accounts in 401k and similar plans: choosing, creating, building and using these accounts.|
|Consider Your Options|
|A plain-language guide for people who receive stock options or other forms of equity compensation.|
|Equity Compensation Strategies|
|A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.|
|Capital Gains, Minimal Taxes|
|Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.|