As you might know, 2010 was a big year for Roth IRA conversions. 2010 was the first year that everyone, regardless of their AGI, could do a Roth conversion. The amount converted is considered a withdrawal from the traditional IRA and therefore subject to tax. For 2010, you have the option to defer the recognition of the conversion gain to subsequent years; 50% in 2011 and the remaining 50% in 2012.

Converting all or part of a traditional IRA into a Roth IRA generally makes sense, other things being equal.  However, when the value of the Roth IRA subsequently plummets, other things are not equal.  In this scenario, the account owner's conversion tax liability is based on a value that no longer exists.  Fortunately, account owners are allowed to recharacterize 2010 conversion contributions back to the traditional IRA. But you need to hurry. This recharacterization must occur by October 17, 2011. 

Recharacterization can be a really smart move if the value of the conversion contribution has declined drastically due to poor investment performance since the conversion date. If you converted your traditional IRA to a Roth IRA in 2010, we recommend you review the investment performance and contact us about a possible recharacterization.

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If you have any questions regarding this issue, please contact the DZH Phillips Tax Department at (415) 781-2500 or email cpas@dzhphillips.com.