Roth Recharacterization, we hardly knew ye. You were the bit of the tax code that let us undo any or all of our Roth conversion, up until the time we filed our taxes. Why was this so valuable? For many of us, taxes are a bit of an unknown. We might not know our exact taxable income until we finish filing our return. From that, it follows that if, during the year, there was a conversion from a traditional IRA to a Roth, the impact to the final tax bill might not be known.
The rules for a recharacterization were very friendly. If, at tax time, you realized the conversion put you into the next bracket, e.g. of a $10,000 conversion, $8000 would be taxed at 15% but the last $2000, 25%, you could send in the paperwork and undo that last $2000. Or, if you moved a stock worth $20,000 and at tax time, the stock is trading at $15,000, just send the stock back to the traditional IRA. On the flip side, if your stocks rose in price, you’d be better off keeping them in the Roth, with tax due on the valuation on the date of conversion.
The Roth conversion hasn’t been removed from the tax code. You should just be careful on the amount and the timing. If your income is stable, and you can forecast your taxable income early on, by all means, take advantage of the opportunity to ‘top off’ your current bracket. If you’re not so sure, you might wish to wait until tax time. I don’t mean April. I mean late November/early December. This is when the tax software comes out and you will have a better idea what your final situation looks like.