Roth IRA conversions can be taxing.

If Meg and Mark Johnson have taxable income of $120,000 this year, for example, they’ll be solidly in the 25% federal income tax bracket. However, if Meg converts her $400,000 traditional IRA to a Roth IRA in late 2013, that would boost the couple’s income to $520,000. They’d move all the way through the 28%, 33%, and 35% tax brackets and still have $70,000 taxed at the top 39.6% rate.

A better solution for Meg might be to convert only $26,400 of her traditional IRA in 2013, which would keep this couple within the 25% bracket this year. With a series of such bracket-topping conversions, Meg eventually could convert most or all of her IRA to the Roth side at a relatively low tax cost, then take tax-free withdrawals after five years and age 59-1/2.

How could Meg convert $26,400 of her IRA, or some other amount that would keep the Johnsons in the 25% tax bracket this year? By doing a larger Roth IRA conversion and then recharacterizing (reversing) the excess amount back to her traditional IRA. “That is an excellent idea,” says Natalie Choate, an attorney with NutterMcClennen & Fish, a Boston law firm.

In our example, Meg might convert $100,000 of her traditional IRA to a Roth IRA this year. When the Johnsons prepare their 2013 tax return in 2014, and they see a hard number for their taxable income without the conversion, they could recharacterize 75%. This would leave them with $25,000 of taxable income (25% of the $100,000 conversion) to report for 2013, squarely within the 25% tax bracket.

“This tactic could benefit a client who cannot get a reasonably close estimate of taxable income for the year, in December,” says Choate, author Life and Death Planning for Retirement Benefits, now in its 7th edition. “If a client can get a pretty close estimate, it's probably not worth it to try and recharacterize in order to get precisely into the tax desired tax bracket.”

Choate gives the example of a client who is a partner in professional services firm. The firm won’t get its accounting finalized until next year, so the client’s earned income is uncertain for now. Other items (taxable sale of a vacation home, charitable deduction requiring a yet-to-be-finalized appraisal) could add to the unpredictability of taxable income for the year. “Such clients could be candidates for this idea,” Choate says.

The potential problems include the amount of number-crunching involved and the chance that the recharacterization won’t occur on time, for some reason. A 2013 Roth IRA conversion can be recharacterized, in whole or in part, until October 15, 2014. Thus, Choate concludes that this maneuver might be suitable for clients who are willing to undertake the paperwork headaches and the possible risks in return for the tax savings involved.

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