There has been plenty of hype surrounding the changes to the Roth IRA rules. And while converting to a Roth may be a great idea for some of your clients, it may not work out so well for others. If that's the case, do not fear-there's a way to turn back the clock if things don't turn out as you planned.

Beginning on Jan. 1, nearly $1.4 trillion of retirement savings became eligible to be converted to Roth IRA accounts under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). All Americans are now able to take advantage of the Roth conversion strategy that was previously limited to those with no more than $100,000 of Adjusted Gross Income.

Overnight, the world of IRA planning changed dramatically. Financial advisors will be well served by discussing with clients the benefits and potential tax advantages of converting some or all of their taxable retirement accounts into a Roth IRA, especially as the current market conditions give clients a chance to convert traditional IRAs while the taxable values of the accounts are low.

The 'Un-Do'

But what if a client converts in 2010 and the account continues to lose value after the conversion? The tax due on the Roth IRA is based on the value of the account at the time of conversion, so your client would face a higher tax bill.

This is the kind of situation where you can take a "do over." The Roth recharacterization rules provide that a poor performing Roth account can be recharacterized back to a Traditional IRA, with no income tax consequences, until as late as Oct. 15 of the year following the year of the conversion. In other words, recharacterization can allow the client the benefit of hindsight.

Let's consider a hypothetical client: Jennifer French, 54-years-old. Five years ago, she left her prior employer and established a Traditional IRA with a $101,400 rollover from her 401(k) plan. Jennifer's rollover IRA had grown to $139,000 by October 2007. However, the account has declined since and the balance is just $97,500 as of today's periodic client review.

In conversation, Jennifer indicated interest in the Roth strategy because she feels that the account is relatively low in value and that income tax rates will likely rise in the near future. Jennifer estimates her 2009 adjusted gross income will be $125,000 ($90,000 base salary and a previously received annual bonus of $35,000).

Let's assume that Jennifer's Traditional IRA account balance on Jan. 15, 2010 was $100,000. We then notified the account custodian that we have converted the entire account from Traditional to Roth, and look forward to potentially improving market performance and tax-exempt account growth.

Jennifer is pleased that after waiting for five years, she will have the flexibility and control to receive income-tax exempt distributions from the Roth account as needed, and not under a forced, required minimum distribution program.

But then let's further assume that 2010 is another year without positive equity markets. Jennifer's Roth account balance is $97,000 as of March 31, and drops to $91,250 by Oct. 31, 2010. At that time, she is concerned about paying income taxes on a conversion balance well in excess of the current balance.

One of the beneficial aspects of the Roth strategy is the ability to recharacterize the transaction (i.e. convert back to a Traditional IRA). Jennifer can partially or fully recharacterize the Roth account, and can do so in 2010, the same year as the initial conversion, or in the next year up to the tax filing deadline, plus extensions.

We remind Jennifer that Roth recharacterization rules allow her to wait until as late as Oct. 15, 2011 to determine whether the conversion made economic sense. She insists, however, that we consider recharacterizing the account back to a Traditional IRA now.

The 'Re-Do'

Still, even if Jennifer does immediately recharacterize back to a Traditional IRA she hasn't missed her opportunity to take advantage of the new Roth rules. If conditions improve she can reconvert her Traditional IRA to a Roth.

To implement a reconversion, the account owner must wait either 30 days, or the until beginning of the calendar year after the recharacterization, whichever is longer. For Jennifer then, if she waits until Dec. 2, 2010 to recharacterize her Roth back to Traditional IRA status, she would be able to reconvert any time during the calendar year 2011. (If she were to recharacterize sooner than Dec. 2, she would still have to wait until 2011 to be able to reconvert.)

The ability to convert, recharacterize, and reconvert on essentially an annual basis can give the client opportunities to ensure that the Roth account is established based on a relatively low account value and, therefore, arguably the least amount of conversion income tax liability.