Recharacterizing IRA Contribution Due to Bad Investments

[Guest downtown]

In 2012 I opened a traditional IRA and a Roth IRA account and contributed $5,000 to each. Unfortunately, I made some bad investments and have lost about 75% in both accounts. I would like to deduct as much of these losses for income tax purposes as I can.

Specifically, I would like to recharacterize the $5,000 traditional IRA contribution as if it had been contributed to the Roth IRA account. I would then withdraw the entire balance of the Roth IRA account prior to April 15th, 2013, thus avoiding any penalty on excess contributions to the Roth account. Then I would deduct the losses as a misc. itemized deduction, subject to the 2% threshold. Any problems with this?

I would also like to make a new $5,000 contribution to the traditional IRA account for 2012, so I can get the above-the-line income tax deduction. Provided this is done after the above-described recharacterization, but prior to April 15, 2013, any problems with this?

thanks in advance!

[masteff]

So was 1/2 of the money you contributed in 2012 actually for 2011? If not then your bigger issue is an excess contribution. If 1/2 was for 2011, your options may be restricted since you're more than 6 months past the due date of your 2011 tax return.