The Error-Proof Portfolio: Undoing an IRA Conversion
Recharacterizations help address declining principal values.
This article originally appeared on Morningstar.com last year. In case you missed it, we're running it again as part of ourIRA Improvement Week.
The decision about whether to convert rests on myriad factors, the main one being whether you expect to be in a higher or lower tax bracket when you begin taking distributions from your IRA. A declining market, like the one we saw from late 2007 through 2009, can also make an IRA conversion a more attractive maneuver. That's because when you convert, you'll owe taxes on your investment gains and any deductible contributions you may have made. The smaller the investment gains, the less taxes you'll owe when you convert.