The Markets September 8, 2010

Not Many Know They Can Undo Roth Conversion

A Fidelity Investments study finds that less than a third of investors who are newly eligible to complete a Roth IRA conversion are aware of the flexibility they have to “undo” the move.
Reported by

Fidelity explained in a press release that the process, known as “recharacterization,” allows an investor to reverse amounts converted from a Traditional IRA to a Roth IRA and recover any taxes paid. The deadline for completing a recharacterization is usually on or about October 15.  

When investors were asked what circumstances would spur them to recharacterize their Roth IRA, the top reason cited was an unexpected drop in their taxable income in retirement (54%). Forty-four percent of investors said they would recharacterize if the additional taxable income from a Roth IRA conversion puts them into a higher federal income tax bracket.   

Other reasons included not having sufficient cash reserves to cover the tax bill (35%) and a significant drop in the value of investments after converting to a Roth IRA (32%).  

According to the press release, the survey coincides with the publication of a new Fidelity Viewpoints article to help investors understand the recharacterization process. The article includes a hypothetical example that illustrates a Roth IRA conversion, recharacterization and another subsequent conversion.  

 

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