Undo/Redo Traditional to Roth IRA Conversion After Market Losses

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If you did a Traditional IRA to Roth IRA conversion in 2008, and have since suffered some significant losses, you may want to consider undoing the conversion now that it is 2009. Then, as long as you wait 30 days after that and still qualify, you can redo the conversion again. This way, you only owe income taxes on the lower amount.

This Roth IRA conversion “do-over” is discussed in this CNN Money article, which included a helpful example scenario:

One of the main considerations are that you want to make sure your losses are enough that they likely won’t be recouped in the 30 days you are “out” of the market. One option is to re-invest the money in a taxable account during that period, but you’d be subject to more potential losses, as well as taxes on gains.

Another consideration is that you are essentially doing a entirely new 2009 conversion. You’ll have to again meet the income limits, and make sure your new tax bracket is acceptable to you. I did a Traditional to Roth IRA conversion in 2007 and shared my decision process, including the eligibility requirements and how to pay for it. There are more details on reconversions in this Fairmark article.

Next up: Controversial ways to deal with other Roth IRA losses.

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Comments

  1. Very nice. Didn’t know what to expect, but was pleasantly suprised.
    Here’s hoping it was really free!

  2. One of the best financial moves I ever made was when I started my business and didn’t have income for a year, I converted my entire traditional IRA to a ROTH. I hardly paid a dime on the conversion after my standard deductions.

    Heck, depending on the numbers, someone who took a year off and converted a big traditional IRA, might save as much in the long run as if they had worked that year!

  3. I’ve put in 10K on my Roth IRA and now It’s less than 7K. Can I withdraw from my Roth IRA without any penalties? I’ve had the account over 5 years and will be withdrawing it for a loss. Any advice?

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