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The Online Advisor - May 1999
IRS issues new IRA reconversion rules
Many taxpayers whose IRAs are invested in stocks and mutual funds have found the current volatility in the stock market to be a problem when converting a regular IRA to a Roth IRA. Since the IRA’s value at the point of conversion determines the tax that will be owed, the best time to convert a regular IRA to a Roth is when the market (and the IRA's value) is lower.
If a conversion from regular IRA to Roth IRA is done when the market is high, the IRA’s value is higher and more income tax will be due. Then if the market falls, a taxpayer is left with less value in his Roth IRA, but with a tax bill based on the higher value at the conversion point.
To get around this tax problem, people were switching from regular IRA to Roth, then back to a regular IRA, followed by an immediate reconversion to a Roth IRA, attempting to fix the IRA’s value at the lowest tax cost.
The IRS has issued rules limiting taxpayers to one such reconversion in 1999. Effective January 1, 2000, the IRS rules will be even tougher. A taxpayer who has changed back to a regular IRA from a Roth will be required to wait until the following year to reconvert to a Roth.
For assistance with your IRA decisions, contact our office.