Is there any solution to returning a transfer made from IRA back to my Roth IRA ?

[Guest tc1811]

I am single, reside in Calif, and for the year 2004 had an adjustable income of zero as I am back in school. At the end of Dec. 2004 I called and made a transfer (9,000) from my IRA to my Roth in order to take advantage of my zero income and therefore avoid having to pay taxes on the money transfered between these accounts.

Then on December 31, 2004 I made another transfer ($4,000) invovlving the same accounts from my IRA to my Roth IRA and thought I had requested the second transfer to occurre in the year 2005.

On April 15th,2005 I realized that both transfers actually were completed for the year 2004. This has created a taxable situation and I will owe income tax on the $4,000 transfer.

My question : Is there any way the IRS will allow me to reverse the transfer I made in error ? Or is there any other options or suggestions that may help in avoiding the taxes the will be incurred on the extra transfer?

Thank you.

ADDITIONAL INFO:

Account History. Originally was an Incentive Thrift Account with my employer opened approx 13yrs ago. I ended employment with the company in 2000. The Thrift account ( approx 36,000 )was rolled over into a Traditional IRA (30,000) and a Roth IRA (6,000) in 2002. In 2003 there was no activity in either account.

For years 2002 to 2004 I have been a student with zero reportable income.

If any other info. is needed please let me know . thanks !

[BPickerCPA]

Roth conversions can be reversed by a process known as "recharacterization". A recharacterization can be in part or full. Since you want to do a partial recharacterization, you or the custodian has to compute the "applicable income" attributable to the recharacterized amount.

You may need professional assistance if the custodian is unable to properly do the calculations.

[John G]

Barry, I thought this guy said he had zero income in 2004 and completed two transfers of IRA of 9k and 4k to Roth in 2004 (proper term would be Roth conversions). I would think that the tax due if any would be negligable. Why undo the conversion?

[Guest tc1811]

Thanks for the reply . John your correct in your post and the tax is probably slight but at this time i am looking at approx 700.00 in taxes that I would rather not pay on the investment when i could just make the transfer this year for free.

[Appleby]

When recharacterizing the $4,000, you need to determine the current value.

The formula is explained in TD 9056 at http://www.irs.gov/pub/irs-regs/td9056.pdf

[John G]

OK, free sounds good to me.

BUT.... if you called on Dec 31, check to see when the action was actually posted. I would think that it was done in January because hardly any IRA dept works that fast. The conversion is effective not based upon the date of your request but rather the date it was completed. If both are actually in 2004 calendar year, as mentioned above, you can do a partial recharacterization - the amount does not have to be pegged to either 4 or 9k.

I am a little troubled by the use of the word "transfer". Normally a Roth conversion requires some paperwork (perhaps a letter of instructions) and there are often delays. (especially at year end and during the prime tax filing season)

I would suggest that if you truely have zero income this year that you might want to crunch your numbers and determine the max amount you can trigger to without have a tax due. If you are working in 2006, but not this year, I would probably convert everything sometime this year and pay the low tax due next year when you file. You don't get many opportunities to due Roth conversions tax free or at the very lowest tax rate... shoot, many people never even qualify for a Roth conversion due to their income.

Don't forget there may be state or local income tax issues.

[Guest tc1811]

John thanks for the last posting and I will call and verify the actual dates the transaction was documented. I do think it occeurred in 2004 on 12/31 based on my statements. The request was made by myself on the phone through their automated service (no human was involved).

Thanks for your time in responding and I will update here with a final outcome.