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Case of the Week: Undoing a 401(k)-to-Roth IRA Conversion

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. 


A recent call with a financial advisor in Maine is representative of a common question relating 401(k)-to-Roth IRA conversions. The advisor asked: 


“One of my clients converted a portion of her 401(k) plan account balance to a Roth IRA and now wants to undo it. Can she and, if so, how?” 


Highlights of Discussion 



  • Yes, your client would be able to “recharacterize” or undo the unwanted conversion by moving the amount plus gains or losses to a new or existing traditional IRA as long as it is done within the IRS-specified timeframe (see Notice 2008-30, Q&A 5, and Internal Revenue Code 408A(d)(6)). She would not be able to recharacterize the amount back to her 401(k) plan.

  • Generally, a recharacterization allows an individual to undo a conversion and eliminate the associated tax liability by moving the assets, plus gains or losses, back to a traditional IRA (even in the case of a qualified plan-to-Roth IRA conversion).

  • Taxpayers who file their federal income taxes on time for a given year may recharacterize an unwanted conversion without tax or penalty up to Oct. 15 of the year following the year of conversion (e.g., Oct. 15, 2015, for a 2014 conversion). Note that if the individual has already filed her tax return for the year, she may be required to file an amended tax return to reflect the transaction.

  • There are very specific tax reporting steps that your client must follow to account for the recharacterization. She should consult with her tax advisor and review the instructions to IRS Forms 8606 and 1040.

  • Following a recharacterization, an individual could, if desired, reconvert the same amount (this time from the traditional IRA) after the requisite waiting period, which is the later of either:

    • 30 days after the recharacterization; or 

    • Jan. 1 of the year following the conversion.




Conclusion


While it is possible to undo an unwanted 401(k)-to-Roth IRA conversion through recharacterization, the transfer must go to a new or existing traditional IRA — not back to the plan from which it originated. 


The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2015 Columbia Management Investment Advisers, LLC. Used with permission.

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