If you converted IRA to Roth in '08, you can still save on taxes

— -- If you converted your individual retirement account to a Roth last year, you probably feel like someone who got married during a weekend in Vegas. It seemed like a good idea at the time, but now you're having serious second thoughts.

When you convert to a Roth, you're required to pay taxes on all pretax contributions and gains. The taxes are based on the value of your IRA at the time of the conversion. That makes an IRA conversion a smart move in a bear market — unless the market continues to plummet after you convert. When that happens, you could end up paying taxes on money you no longer possess.

For example, suppose you converted an IRA valued at $100,000 last spring. On April 15, you'll owe taxes on $100,000, even if your Roth is now worth less than half that amount.

Fortunately, reversing an ill-timed IRA conversion is a lot easier — and less expensive — than getting out of a madcap marriage.

You can undo the damage by "recharacterizing" your Roth. That process turns your Roth back into a traditional IRA, wiping out your tax bill.

If you don't think you can get the job done by Wednesday, you can buy yourself some time by filing for a six-month extension to file your 2008 tax return, says Barry Picker, an accountant and financial planner in Brooklyn, N.Y. After you recharacterize, you can file your tax return, and you won't owe taxes on the conversion, he says.

Just make sure you recharacterize by Oct. 15, which is the deadline for reversing IRAs converted in 2008. Otherwise, you'll be subject to steep penalties.

Back to the future

Recharacterizing doesn't mean you have to abandon your quest to convert your IRA to a Roth. If you recharacterize an IRA you converted last year, you can convert back to a Roth once 30 days have elapsed, says Ed Slott, an IRA expert and certified public accountant in Rockville Centre, N.Y.

Converting your IRA back to a Roth is a smart move, Slott says. Tax rates are likely to rise in the future, he says, so converting now will allow you to take advantage of current tax rates.