IRS Deadline to Switch IRA Back From Roth Looms

So why would an investor put themselves through such back-and-forth rigmarole?  The answer is to change the fiscal year in which the conversation is effective, thereby taking advantage of lower tax rates and other benefits unique to their situation.

"The primary factor that motivated conversions to Roth IRAs in recent years has been the prospect of higher ordinary income tax rates in 2013," adds Robert Bloink, a professor of tax at Thomas Jefferson School of Law and an AdvisorOne contributor.  "Funds contributed to a traditional IRA are contributed pre-tax today, but are taxed at ordinary income rates when they are eventually withdrawn. Conversely, funds contributed to a Roth are taxed today and withdrawn tax-free."

Bloink notes that if a client's Roth IRA performed poorly since it was converted, it might not be worth the taxes that the client continues to owe in 2012, even though the value of the account decreased.

"While converting to a Roth in 2012 remains a smart move for many clients, advisors should examine the results of any conversion because of the uncertainty accompanying that initial conversion," Bloink concludes. "The option of undoing the conversion and trying again for next year is a valuable part of the Roth conversion strategy and could save your clients thousands in taxes."