

When you convert an IRA to a Roth, you generally owe income tax on the amount you move over, but you're allowed to undo -- or "recharacterize" -- the conversion and put the money back into a traditional IRA. And you can go back later and re-convert the money to a Roth.

It's easy to see why some people may want a do-over. You owe income tax on the untaxed amount you pulled out of an IRA, even if the account value then dropped and is worth less now than when you converted. That scenario is not unlikely given market volatility lately.

For some, a reduced account balance is reason enough to recharacterize. Others may be eager to undo their conversion if, after doing it, they fell into dire financial straits and now can't afford the tax bill.

You can undo your conversion for any reason, but time is running short for those who converted to a Roth in 2010. The deadline for a do-over is Oct. 17 this year.

More people may be eyeing a do-over, if only because the number of people who converted to a Roth soared in 2010, thanks to new rules that made more people eligible to convert. Before 2010, people with adjusted gross income of more than $100,000 generally couldn't convert to a Roth. Even today, some high-income taxpayers can't contribute to a Roth -- but they can convert a traditional IRA to a Roth.

Tapping a Roth IRA can be a useful retirement strategy. For one, Roth IRAs help to mitigate your tax burden. You contribute after-tax money but all of your contributions and earnings come out later tax-free, unlike the taxable distributions of most other retirement plans.

Also, unlike a traditional IRA, there are no required minimum distributions at age 70[frac12]. Roths also are a useful estate-planning tool: You can leave your Roth to, say, your grandson and he won't have to start distributions until the year after you die. Distributions are stretched out across his life; meanwhile, the account's earnings grow tax-free.

At Vanguard Group, the number of IRA-to-Roth conversions soared to 230,000 in 2010, a 423% rise from about 44,000 in 2009. At Fidelity Investments, conversions rose to about 220,000 in 2010, a fourfold increase from a year earlier. The steep increases likely were driven by high-income individuals taking advantage of the new rule letting them move to a Roth.

Someone who expects to be in a lower tax bracket in retirement may wait to convert to a Roth, but "there are some people who expect to always be in the top bracket and 2010 was the first year they could convert," says Bruce Steiner, an attorney with Kleinberg, Kaplan, Wolff & Cohen.

Plus, last year people had the option of spreading out the tax due on the conversion over their 2011 and 2012 tax returns, rather than reporting that income on their 2010 return.

In 2011, the number of conversions so far has dropped, to about 50,000 year-to-date for Vanguard and about 60,000 for Fidelity. And despite the big uptick in conversions in 2010, not many people have opted for a do-over this year.

That might be because the high-income individuals who rushed to convert likely had financial advisers to help them plan their strategy, says Ken Hevert, vice president of personal retirement products at Fidelity. "This population had significant resources available to them to figure out whether a Roth might figure in their long-term plans."

Some financial advisers see the option to recharacterize as an opportunity to boost clients' after-tax investment returns. David John Marotta, president of Charlottesville, Va.-based Marotta Wealth Management, says for his clients last year he converted about five times the amount of money they said they wanted in a Roth.

For each client, he divided the money into five Roth accounts, each focused on a distinct asset class. The account that performs the best, he'll keep in a Roth for the tax-free gains. The others he will recharacterize.

Others say retirement savers should focus on the long-term benefits of a Roth, and undo their conversion only if they saw steep market losses or are desperate to avoid that tax bill.

If you undo your conversion, you can put the money back into a Roth later. But you must wait 30 days before reconverting, and you can't reconvert money in the same year that you made the original conversion.

If in your 2010 conversion you took advantage of the option to pay the tax due over two years, in 2011 and 2012, and now you recharacterize and then reconvert, you lose access to that perk. Keep in mind that recharacterizing a conversion solely to reduce your tax bill -- you plan to reconvert your now-reduced account balance to a Roth after the waiting period ends -- can backfire if the market gains in the interim.

If you want a do-over, call your Roth IRA custodian soon, and keep track of the paperwork. If you already filed your 2010 return, you must amend it.

For more information, read Internal Revenue Service Publication 590, at

Write to Andrea Coombes at

—