Retire without taxes

You get a do-over. Really. Around the IRS, the second chance goes by the more technical name "recharacterization." Essentially, you can undo the conversion and return your money (plus earnings, if any) to a traditional IRA, then reconvert later. This option can come in handy if the market stumbles (or you find you don't have enough money to pay the conversion taxes).

Suppose you convert a $100,000 IRA to a Roth and shortly afterward the value drops to $80,000. Even though your Roth is worth 20% less, you'll still owe taxes based on its value on the conversion date, or $28,000 assuming you're in the 28% bracket. By recharacterizing, however, you can move the $80,000 back into a regular IRA and reconvert later. Assuming your IRA is still worth $80,000, your next conversion will cost you $22,400, leaving you with the same amount in the Roth but saving you $5,600 in taxes.

You can undo a conversion anytime up to the filing deadline, including extensions. So if you converted in the 2008 tax year, you can switch back as late as Oct. 15, 2009. If you want to switch into a Roth again, you must wait until the year after your original conversion (2009 in this example), and you must wait 31 days after you did the recharacterization.

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