October 15 deadline to change Roth IRAs for tax savings

Last year's stock-market meltdown was hard enough to stomach without having to lose a chunk of losses to taxes. If you converted from a traditional IRA to a Roth IRA last year and paid taxes on an account that's been decimated, you have until October 15 to reverse it. 

Say your IRA was worth $100,000 last year when you converted it to a Roth, and your account is only worth $60,000 now. You essentially paid taxes to convert the IRA on an additional $40,000 you no longer have. The tax code allows you to reconvert, or recharacterize, the Roth back to a traditional IRA and get a refund on the taxes you paid. And if you want, you can then convert it back to a Roth, but pay taxes only on the new account value. If you undo a Roth conversion that you made in 2008, you only have to wait 31 days to reconvert it into a Roth. However, if you converted in 2009, you'll have to wait until Jan. 2, 2010 to reconvert.

To do the deal, talk with the custodians of your Roth IRA; they’re the ones who need to set up a new IRA in which to transfer your Roth money, says Jim Wagner, CEO of Trust Administration Services, a Carlsbad, Ca.-based company that provides services for self-directed retirement plans. Depending on your administrator, there may be fees involved. You’ll need to fill out IRS Form 8606, Nondeductible IRAs. Your accountant can tell you whether you’ll need to amend any tax returns as a result of the change.

For a more in-depth discussion see this article in Financial Planning magazine by IRA guru Ed Slott  and this article from Bankrate.com. For more information on tax-law changes that will give many more people the chance to convert to Roth IRAs next year, read "New Twists on Roth IRAs" from Consumer Reports Money Adviser.–Chris Fichera