Tax Filers Get Chance to Rectify IRA Conversions

After receiving “a few hundred” tax returns in which taxpayers improperly converted traditional IRAs to Roths, the IRS says taxpayers may “re-characterize” these transactions to avoid penalties--but must do it quickly.

Taxpayers may not convert a traditional IRA to a Roth in a tax year in which their income--married or single--exceeds $100,000. If they do, they are subject to income taxes and a 10% penalty on the converted amount. However, if they simply erred, they can undo the conversion--that’s “re-characterization” in tax-speak--by putting the money back into a traditional IRA before Thursday’s deadline, the IRS said. Taxpayers who receive a filing extension have until Aug. 15 to undo a conversion without penalty.

As for the taxpayers who improperly converted Roths in filings already received by the IRS: “I can only guess that they didn’t read the directions,” said Don Roberts, an IRS spokesman in Washington.

Taxpayers who have already filed but now realize that they were not allowed to convert their IRA should file a 1040X amended return.