By acting by October 15, 1999, you have a last chance to "reach back" and change the nature of an IRA contribution (including conversions to Roth IRAs) you made for the ’98 tax year. This works as long as you filed your ’98 return by April 15, ’99, or got a filing extension and filed your return by the extended due date.

You have until October 15 to make any of the following moves:

• If you contributed to a traditional IRA (on a deductible or nondeductible basis) for the ’98 tax year, you can recharacterize the contribution to a Roth IRA instead (assuming you qualify for a ’98 Roth IRA contribution).
  
• If you contributed to a Roth IRA for the ’98 tax year, you can recharacterize the contribution and treat the pay-in as having been made to a traditional IRA instead (assuming you are otherwise eligible to do so).
  
• If you converted funds from a traditional IRA to a Roth IRA for the ’98 tax year, you can "undo" the conversion – in effect, it’s as if the funds never left the traditional IRA.

You may want to recharacterize a ’98 IRA contribution for one of many reasons. For example, based on your personal situation, you may now believe that a deductible contribution to a regular IRA would have better served your purposes than a (always nondeductible) contribution to a Roth IRA. Or you may have converted a large sum from a traditional IRA to a Roth IRA and now regret having done so because of the tax bill generated by that move – even though the income resulting from the conversion would be spread over four years (’98 through 2001) if you left things alone. Another possibility is that you may have made your traditional-IRA-to-Roth-IRA conversion when your traditional IRA's investment portfolio stood at a very high valuation, and has since dropped to lower levels. The recharacterization mechanism allows you to treat the taxable conversion as if it had never been made.

How do you go about "recharacterizing" a ’98 IRA contribution? You can either leave the money parked where it is now and instruct the IRA trustee to recharacterize the transaction (essentially, you tell the trustee to change the account from a traditional IRA to a Roth IRA, or vice-versa). Alternatively, you can initiate a trustee-to-trustee transfer and shift funds from the account (the contribution to it, and any earnings on the contribution while in the account) to the other type of IRA. For example, suppose a person made a $2,000 contribution to a Roth IRA, when he could have instead made a deductible $2,000 contribution to a traditional IRA. Now the Roth IRA account shows a balance of $2,300. By recharacterizing the entire balance as a traditional IRA, the person is treated for tax purposes as if he or she made a deductible IRA contribution of $2,000 for 1998, and earned $300 tax-sheltered within the traditional IRA.

Remember, though, you must make sure that the appropriate corrective action – that is, the recharacterization – is completed by October 15, 1999.

There is one other step: If you have already filed your 1998 return you will have to file an amended return for 1998. Doing so will generate a tax refund if you are (1) recharacterizing a Roth IRA contribution as a deductible contribution to a traditional IRA, or (2) recharacterizing a conversion from a traditional IRA to a Roth IRA. On the other hand, you will owe extra tax if you are recharacterizing a deductible traditional IRA contribution as a Roth IRA contribution. Although you must move quickly to initiate the recharacterization, you have time to file the amended return. It must be filed by the normal deadline for amended returns, i.e., within 3 years after the date the original return was filed, or within 2 years after the date the tax was paid, whichever is later.

Please contact us if you’d like to re-examine your 1998 IRA contribution strategy and "change your mind" before October 15.

(09/16/99)