You decided to convert your IRA into a Roth account. Now you’re regretting you ever made that move. Is there anything you can do?

Yes, there is. The IRS lets investors “recharacterize” money they’ve put into a Roth, as long as you do so within the required time period. You simply need to ask your bank’s trustee—the entity that actually holds your funds—to transfer the Roth funds into a Traditional IRA.

Assuming you do so by Oct. 15 of the year following the initial Roth conversion, the government views the contribution just like any other Traditional IRA contribution that year. In effect, it’s as if the Roth conversion never happened.

You can even reverse a conversion from money in an employer-based retirement plan that you’ve moved to a Roth IRA, provided you transfer the funds to a Traditional IRA. You can’t, however, simply shift it back to the workplace plan.

What Does ‘Recharacterization’ Mean?

First, it’s important to understand what it means to convert a Roth to a Traditional IRA. With a Traditional IRA—or a Traditional 401(k), for that matter—you make tax-deductible contributions, and your money grows on a tax-deferred basis. When you take the money out in retirement, you pay ordinary income taxes on the amount of the withdrawal.

A Roth account works in the opposite direction. You invest after-tax dollars but don’t owe any taxes on qualified withdrawals after age 59½. So when you convert your traditional IRA to a Roth, you pay income taxes on your balance now in order to enjoy tax-free withdrawals in retirement.

And that’s something that a lot of investors choose to do, for a number of reasons. For example, you don’t have to take required minimum distributions at age 70½ with a Roth account, as you would with a Traditional IRA (and with a Roth 401(k), too). In addition, younger workers might expect to find themselves in a higher tax bracket in their more advanced years, making a Roth the more attractive option.

Why Undo a Conversion?

But in certain scenarios you may think better of your earlier decision to perform a Roth conversion. For one, investors often face a big upfront tax bill in order to achieve even bigger benefits down the road.

Suppose you want to convert $100,000 from your Traditional IRA into a Roth, and you’re in the 25 percent tax bracket. That means you’d need to fork over $25,000 to Uncle Sam this year. Needless to say, the conversion can put the investor in a short-term financial pinch. Maybe you realize that you simply don’t have the assets to pay a hefty tax bill.

Another reason to hit the “undo” button: You’ve just seen the value of your retirement funds take a hit. In such situations your Roth IRA suddenly doesn’t make a whole lot of sense.

Imagine you transferred $100,000 to a Roth, as in the earlier example. You’re in the 25 percent tax bracket, so you paid $25,000 to the IRS. But what if market turmoil causes your account balance to drop by, say, 20 percent? Now you’ve paid $25,000 on just an $80,000 balance. So, in effect, you’re paying a 31 percent rate on those funds. In a lot of cases the investor will want to nullify the conversion.

Yet another reason to recharacterize your retirement account is if you’ve started contributing to a Roth, but realize you are going to exceed the income limits laid out by the IRS. For 2017 the income threshold at which single filers can contribute to a Roth starts to phase out at $118,000 a year and completely caps out at $133,000. For joint filers those amounts are $186,000 and $196,000, respectively.

If your income exceeds those caps, you’ll be slapped with a 6 percent penalty on any Roth contributions you’ve made. It’s a consequence you’ll have to think about if, for example, you just took a new job that pays more money.

What Happens to Paid Taxes?

If you’ve already sent in your tax return and paid the applicable taxes on a conversion, you can file an amended return. You’ll just need to subtract the recharacterized funds from the taxable amount of the rollover or conversion on your initial return. In order to get a credit or refund for taxes you’ve already paid, you’ll have to file a Form 1040X (Amended U.S. Individual Income Tax Return) by whichever occurs later:

  • Three years after the date of your original tax return filing (including any extensions)
  • Within two years of the date you paid taxes on the Roth conversion

So don’t fret if you’re starting to lament your Roth conversion. The IRS allows you to cancel it out and make a fresh start.