Converting your traditional IRA to a Roth IRA probably seemed like a good idea when you did it, but unforeseeable economic circumstances may have you regretting that decision now. If so, in some cases there's a way to undo your original conversion and possibly save yourself a heavy and untimely tax bill. It's called a "recharacterization."

First, though, let's look at how you got here. The advantages of the Roth IRA, like the fact that any amount of money withdrawn from a Roth is tax free, convinced you to switch your money to a Roth IRA from a traditional IRA. Withdrawals from a Roth IRA are tax free because any contribution already has been taxed.

With your traditional IRA, however, you contributed money before it was taxed. So, up to certain limits, your contribution was not included in your income and was not taxed as ordinary income. This is why when you start withdrawing money from a traditional IRA, you'll have to pay ordinary income taxes on all withdrawals.

As long as you own a Roth for five years and are at least 59 years old, all withdrawals are tax free, and you aren't subject to required minimum distributions (RMD). These are the benefits of a Roth IRA—tax-free withdrawals and no RMDs.

In contrast, a traditional IRA requires you to begin making withdrawals by April 1 the year after you turn 70 years old. The reason for this, of course, is that Uncle Sam finally wants his share, since the entire account has been tax deferred for all those years. Also, if you fail to take your RMD, or don't take enough, you can be taxed 50 percent on the shortfall.

With a Roth IRA, you already have paid taxes on the amount contributed, so Uncle Sam already has gotten his cut; therefore, there are no RMDs for a Roth IRA, unless the account has been inherited. The main disadvantage, of course, is that you have to pay ordinary income taxes on the amount you convert. Therefore, it's recommended that you don't use money from your traditional IRA to pay taxes on the conversion. Assuming you are younger than 59 years old, you might be required to pay taxes, and a 10 percent penalty for early withdrawals, on any amount not converted, plus that money is ineligible for tax-free growth.

With this in mind, let's say you were 45 years old, had money in a taxable account to cover the taxes, and you liked the advantages of a Roth IRA, so you decided to convert your traditional IRA to a Roth IRA. On Oct. 30, 2007, your account was worth $100,000; so you calculated that it would average approximately 8 percent for the next 20 years. However, when you filed your income tax return on April 15, 2008, you had to pay $22,000 in taxes on the conversion.

Ouch! Still, you felt confident when you did the conversion that the pain of paying taxes would be long forgotten when you turned 65 years old and could begin withdrawing money tax free.

Let's say, though, that something happened between last October and the present that you didn't see coming. You had invested heavily in financial stocks, insurance stocks, and commodities, and your $100,000 account now is worth a mere $35,000. Based on this new value, the $22,000 in taxes you just paid were at an effective tax rate of 63 percent—a very unwelcome reality.

Now you really are pulling your hair out. You have lost $65,000 in your portfolio and paid $22,000 in taxes, for a total loss of $87,000, and are asking yourself why you did this in the first place. Well, take a deep breath. That previously mentioned tax strategy, a recharacterization, may be just what you need to extricate yourself from this worrisome predicament.

Switching your Roth IRA back to a traditional IRA could get you back the $22,000 you paid in taxes. The money you lost on your investments is gone, unless they eventually rise in value again, but at least you recoup your tax money.

But be proactive. If you converted your Roth IRA in 2007 and filed your tax return by April 15 of this year, it's too late now to do a recharacterization. The Oct. 15 deadline for doing so just passed. You would have needed to do an amended tax return (Form 1040x) and report the recharacterization on Form 8606. However, if you convert your traditional IRA this year and haven't yet filed your tax return, you still have plenty of time to recharacterize, since the deadline is Oct. 15, 2009.

You may want to wait until that date approaches. Here's why.

Say your Roth IRA has 20 stocks in the portfolio. Ten of them have done very well, and 10 of them have tanked. You can cherry-pick your recharacterization. In other words, you can recharacterize the 10 stocks that have tanked and leave the other 10 in the Roth IRA.

Understand this, though—any recharacterization must be a trustee-to-trustee transfer. That means you cannot withdraw the funds from your Roth IRA then roll them over within the allowed 60-day time period. If you do that, the IRS probably will disallow the entire recharacterization.

Let's say time passes, and your traditional IRA, which was converted to a Roth IRA and recharacterized back to a traditional IRA, has increased in value and again looks like a good candidate to convert to a Roth IRA, called a reconversion. There's no limit on the number of times you can convert, then recharacterize, and then do a reconversion.

There are, however, time limits. The waiting period is 30 days after the recharacterization, or the beginning of the tax year after the year of the conversion, whichever is later. In other words, if you converted in October 2007 and recharacterized in September 2008, you may reconvert on Jan. 1, 2009. If you converted in June of 2008 and recharacterized on Dec. 20, 2008, you must wait until Jan. 20, 2009 to reconvert.

As always, tax laws for IRAs can be complex. Picking stocks might be something you enjoy on your own, but when it comes to retirement accounts, consult your financial adviser.

Any mistakes made are usually irrevocable and could cost you or your heirs thousands of dollars.