Sometimes it pays to put your money back into a traditional IRA. By Kimberly Lankford, Contributing Editor July 30, 2008 I transferred about $80,000 in January from a traditional IRA to a Roth with the same company. It's now worth $15,000 less. Can I undo the transfer and then redo it so I don't have to pay taxes on the $15,000 in lost value?You're in luck: This is one case where the IRS permits a do-over of the conversion so you can lower your tax bill. When you convert a traditional IRA to a Roth, you normally need to pay income taxes on the full amount of the conversion (except for any non-deductible contributions), even if the account is worth a lot less by the time your tax bill is due. But you can shrink the tax bill by undoing the conversion and starting over again. The process is called "recharacterization." If you ask the IRA sponsor to recharacterize your conversion and put your money back into a traditional IRA, then you don't need to report the original conversion to the IRS. Then you can convert the traditional IRA to a Roth later and pay taxes on the smaller balance. Advertisement The move could save you a lot of money. If you're in the 25% income-tax bracket and you have to pay taxes on the full $80,000 conversion, you'd end up with a $20,000 tax bill -- a hard pill to swallow, considering the account has lost so much money since then. But if you recharacterize and then convert the $65,000 balance to a Roth, your tax bill would shrink to $16,250 -- resulting in a $3,750 tax savings. You have until six months after the due date of your 2008 return to undo a 2008 Roth conversion (October 15, 2009). But you can't reconvert the account to a Roth immediately. You have to wait until the year after the original conversion was made to reconvert the account, or at least 30 days after recharacterizing, whichever is later. So if you recharacterize now, you'll have to wait until 2009 to reconvert the IRA to a Roth. If you recharacterize a 2008 contribution in 2009 (before the October 15, 2009, deadline) then you'll have to wait at least 30 days before switching the account to a Roth again. If you recharacterize after April 15, 2009, then you'll have to pay taxes on the conversion and file an amended return to get the money back. Keep in mind that you can only convert a traditional IRA to a Roth in years when your adjusted gross income is below $100,000 (whether single or filing jointly), but that income limit disappears in 2010. For more information, see the recharacterization and reconversion section of IRS Publication 590 Individual Retirement Arrangements. Got a question? Ask Kim at firstname.lastname@example.org.