The Year 2000 Was Not a Good Year For Roth Rollovers

Most investors saw their stock portfolios drop in value as 2000 came to a close. This could have some very adverse tax effects on those who rolled their traditional IRA funds into a Roth IRA during 2000.

Under the tax law, rollovers from a traditional IRA to a Roth are subject to income tax. The amount of tax is based on the value of the IRA on the date of the rollover. Paying income tax on the rollover can be bad enough, but paying tax on value that is no longer there is like pouring salt in the wound. Let's look at this example:

In March 2000, Bob had a traditional IRA invested in a mutual fund with a market value of $100,000. He qualified for and asked that the funds be rolled over into a Roth IRA. However, by December 2000, his fund statement showed that the value of his Roth IRA had dropped to $70,000. Not only has he lost value in his IRA, but Bob will also be taxed on his 2000 tax return on the full $100,000, the value of the IRA at the time of the rollover.

Fortunately, Bob can reverse the rollover and eliminate the tax bill he would otherwise face. He has until the due date of his 2000 tax return (including extensions) to "recharacterize" the Roth and switch it back to a traditional IRA. If properly done, Bob will have no income tax due on the Roth rollover.

The rules governing IRAs are among the most complex in the tax code. For assistance in this area, please contact Kenneth D. Eichner, P.C. We are here to see that you pay no more tax than the law requires.

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