After a mid-year slump, the broad stock market is down from late last year. If you converted a traditional IRA to a Roth IRA then, you may have paid tax on money you no longer have.

Say Helen Jones converted a $200,000 traditional IRA to a Roth IRA in 2010. She picked up $200,000 of income from that conversion. (Under a quirk in the tax law, Helen reported $100,000 of income on her 2010 return and agreed to report the remaining $100,000 on her 2011 return.)

Now, though, Helen’s Roth IRA has fallen from $200,000 to $180,000. Fortunately, Helen can “recharacterize” any or all of her 2010 Roth IRA conversion until October 17, 2011. The amount recharacterized will go back into her traditional IRA and the tax obligation will be nullified. (Roth IRA conversions always can be recharacterized; the usual deadline is October 15 of the year after the conversion.)

In this example, Helen recharacterizes the entire conversion by October 1, 2011. She already has paid some tax on her 2010 tax return so she must file an amended return to claim a refund.

After such a recharacterization, you must wait more than 30 days to re-convert. Thus, Helen can re-convert her traditional IRA to a Roth IRA as early as November 2011. If the account is still worth $180,000, Helen will report $180,000 in tax from the re-conversion, so she’ll owe less tax than she would have paid on the now-void $200,000 Roth IRA conversion in 2010.