I converted from a traditional IRA (invested in mutual funds) into a Roth IRA in January 2001. I knew that I would need to pay taxes on the conversion. I did not pay estimated taxes on this conversion because I could always recharacterize the conversion before fileing my taxes. I reasoned that I did owe the tax liability until I made the FINAL decision to recharacterize or not.

I had sufficient funds in other mutual funds to pay this tax. I had expected the value of mutual funds to increases during the year so that I would be able to pay the taxes with some of the increase in the funds. As we all know mutual funds have lost money this year thus the conversion after paying the taxes in no longer a good deal.

However, if the stock market rebounds the first part of 2002 then I should not recharacterize. I know that I have until I file my tax return (could be as late as October with extensions) to make the decision to recharacterize. My 2001 estimated tax payments will exceed 108.6% of my 2000 actual taxes thus I am protected from paying an underpayment penalty.

My question is if I file my tax return in April (to allow the stock market to rebound) am I correct in that I will only owe the taxes due without any interest or penalty? If I obtain extension(s), will I only owe the interest on the late payment? What is the interest rate charged?

You are correct that provided you file and pay your taxes by April 15, 2002 you will have no interest or penalties (since you meet the 108.6% of preior year's tax safe horbor exception).

If you obtain an extension and do not pay the tax owed, then interest will accrue from April 15th until the date you pay the tax. The rate has been changinf a lot lately - check the irs website at www.irs.gov - but it's something in the order of 7%.

If the amount you owe is a substantial proportion of your total liability (again I am afraid I do not recall the exact percentage off the top of my head, but something in the order of 20% sounds right), then additional penalties can be imposed on top of the interest. I think the instrucitons for Form 1040 and Form 4868 (extension) on the IRS website should help you out.

Rod