You may be thinking of ways to shield income from taxes so that you don't pay Uncle Sam more than your fair share. 

Some of you may have converted IRA money to a Roth IRA, where you paid taxes on the assets converted, but have freed yourself from additional taxes on the future increases in your investment accounts. 

This can be a very smart strategy, especially for those of you in higher tax brackets, and some of my clients have made substantial returns once converting to a Roth IRA.  I like to see my clients benefit from using smart strategies like this. 

Wouldn't you like to benefit from making smart moves, too?  The more aggressive your investment strategy, the more you stand to gain from not having to pay tax on future investment earnings.

But what happens if you made such a conversion last year, and the market suddenly drops to make your investments worth less than the amount you converted and paid taxes on?  Or perhaps your particular investment performs very poorly.  What can you do?

Well, the government gives you an opportunity to reverse that decision up until October 15th of the following year.  This is what is called a Roth recharacterization.

So, let's say that Joe converted $100,000 of his IRA money in June 2013 to a Roth IRA, and the amount has now grown to $152,000.  Joe will be thrilled because he now has an additional $52,000 in investment income that he won't have to pay tax on when he takes it out of his Roth IRA account.

But suppose Mary had an IRA of $100,000 that she also converted in June 2013, and the investment did poorly and is now worth only $60,000.  On October 1 of 2014, the investment is still worth only $60,000.  Mary decides to recharacterize the $60,000 on October 1, 2014 and not pay the tax on the $100,000 she originally converted.

If she already filed her 2013 return, she would need to amend it, but if it is on extension, she can file the return and not have to pay the tax on the originally converted amount.

Now she must wait at least 30 days to reconvert the money back to a Roth IRA.  Since it was originally converted the prior year, she can reconvert the $60,000 on November 1, 2014 and only pay tax on $60,000.

If the original conversion had been done in the current year (2014), she would have to wait until the following calendar year (2015) and after at least 30 days have passed to reconvert the recharacterized amount.

Partial recharacterizations are also an option.  So, if you want to limit the amount of tax you are paying, you can recharacterize a portion of the original amount as well.