You have until Oct. 16 to return to regular IRA from Roth IRA

To avoid tax, you may apply for 2 extensions


Dollar & Sense

March 19, 2000|By Neil Downing | Neil Downing,PROVIDENCE JOURNAL

Q. I've switched to a Roth and did so in 1999. I'm wondering if I can get out of this and go back to a regular deductible IRA.

--R.S., Bend, Ore.

A. Yes. You have until Oct. 16 to switch back to a traditional Individual Retirement Account (IRA), said Ed Slott, a certified public accountant in Rockville Centre, N.Y.

Your question suggests that you took money (or other assets) out of your traditional IRA last year and put it into a Roth IRA.

When you make such a move, known as a conversion, you trigger federal income-tax consequences. In general, the amount you take out of a traditional IRA and put into a Roth IRA is subject to federal income tax for the year you make the move. Because you converted last year, you'll have to pay tax soon (if you haven't already done so). The tax is due by the mid-April filing deadline.

To avoid the tax, you can reverse your conversion. In other words, you can take the money (or other assets) out of the Roth IRA and move it back into a traditional IRA. This will wipe your slate clean; from a federal income-tax standpoint, it'll be as if you never converted to a Roth IRA from a traditional IRA.

You have until mid-October to do this and still have it count for the 1999 tax year, Slott said. Why so late? It's true that the filing deadline for federal income-tax returns is generally mid-April.

However, you have the option to get an automatic four-month extension, which moves the deadline to mid-August. You can also file for another extension, for two months, pushing the deadline into mid-October, said Slott.

Whichever route you choose, consult a tax adviser, because you must account for all this to the Internal Revenue Service, and you don't want to go astray of the rules. This is especially true if you decide to reverse your direction once again and convert back to a Roth.

Why convert a traditional IRA to a Roth IRA at all? There are lots of reasons. With a traditional IRA, for instance, you eventually must make withdrawals, and most or all the money you withdraw will be taxed. Also, you generally may contribute to a traditional IRA only until you turn 70 1/2. With a Roth IRA, withdrawals are free from federal income tax, as long as you meet the rules. You can contribute no matter how old you are, as long as you have earned income.

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