Ask the Experts: How do I undo my 2006 Roth IRA conversion?

So you converted your traditional IRA to a Roth IRA in 2006, and now you’ve determined that the conversion no longer makes good tax sense, or that you were ineligible to make the conversion in the first place. What do you do? You may be able to reverse (“recharacterize”) your conversion. When you recharacterize a Roth conversion, it’s as though the conversion never occurred, and the funds are treated as having never left your traditional IRA.

Generally, to undo a Roth IRA conversion, you’ll need to take the following steps:

Identify the traditional IRA that will “take back” the recharacterized contribution (plus any earnings allocated to the contribution) in a trustee-to-trustee transfer. This can be the same traditional IRA you converted from, or a new IRA.

Notify the financial institution that you intend to recharacterize your contribution. Your financial institution should have a specific form for this that contains all the information required by the IRS. If more than one financial institution is involved, you must notify both financial institutions–the one servicing your present Roth IRA and the one that will accept the recharacterized funds. You must provide the notice on or before the date the assets are transferred back to the traditional IRA.

Meet all applicable deadlines. The deadline for recharacterizing a Roth IRA conversion is the due date for your 2006 federal income tax return, including extensions. So, if you file for an automatic extension to October 15, 2007, you also have until then to recharacterize your 2006 conversion. (A special procedure applies if you file your tax return by April 16, and then later decide to recharacterize.)

Report the recharacterization by attaching Form 8606 to your 2006 tax return.
Failure to comply with all the technical requirements for a recharacterization can have serious tax consequences, so be sure to ask your financial professional for assistance.