Conversion/Recharacterization/Conversion-Can this be Done?
Thanks in advance for any assitance on this question. Client converted $100,000 to Roth IRA in February. Due to decline in market, wants to put back into IRA – then – wants to convert again. Is there a waiting period between recharacterization and “re-conversion”?
In otherwords, in 2008, can he put the assets purchased with the original $100,000 back in the IRA and then convert this same amount (or something close to it) from the IRA back to the Roth? This would be accomplished by selling $100,000 worth of securities in the IRA and then transferring the cash to the Roth before year-end.
What would this all accomplish? Let’s suppose that we used the $100,000 conversion that we made back in Feb. to purchase 10,000 shares of XYZ Fund in the Roth. That $100,000 is now worth only $65,000. We undo the Feb. conversion by transferring the 10,000 shares back to the IRA. In two weeks or so we create a new $100,000 conversion from the IRA to the Roth and use it to buy 15,000 (rounded) shares of XYZ Fund (or ant other fund for that matter).
So, where does that leave us–
– still have $100,000 of taxable income we needed to generate in 2008
– now have 15,000 (rather than 10,000 shares) of XYZ Fund in the Roth at the lower basis. Granted those additional 5,000 shares have been purchased via a $35,00 appropriation from the IRA.
– The $35,000 worthless loss that presently sits in the Roth has now effectively been transferred back to the IRA where it does have a tax value (in that it won’t be there to take as a future taxable distribution due to MRD – which starts in 2009).
Permalink Submitted by Alan Spross on Thu, 2008-11-06 17:33
There are a number of issues here.
First, a reconversion of the same amount is not allowed in the same tax year or within 30 days of a recharacterization, if longer. For someone who has converted their entire TIRA, they must wait out these periods.
But for someone who only converted part of their TIRA, they can still convert a DIFFERENT AMOUNT without regard to the above limitation. In that case, they should do the second conversion prior to recharacterizing the first conversion, and convert to a new Roth account, not the same one. In your case here, it is not clear whether the client has other assets in the TIRA, or 100,000 was the entire balance when it was converted.
The holdings, whether in stocks or cash is not really material to this, since there is no requirement to maintain the same holding throughout the process. If the client has the other dollars to make another conversion, they could easily replicate your scenario and end up with more shares of the same stock in the second conversion.
As long as you avoid a disallowed reconversion, the outcome is as follows:
1) 100,000 is still the net amount of additional taxable income for the year.
2) You WOULD have more shares in the Roth, but still worth 100,000 or so.
3) As you indicated, the loss then resides in the TIRA in the form of a lower balance, lower RMDs or lower amounts left to convert in the future.
If this IS the only IRA value the client has, the choice is:
1) If there is a need to use the 2008 tax brackets, ie. have a conversion in 2008, client could wait to see if the shares recover prior to recharacterizing. The deadline is the extended due date next year. If they recover enough, the 2008 conversion holds.
2) If the shares do not recover, they can be recharacterized next year and converted again after 30 days, but the new conversion will be taxable in 2009.
Note that the one rollover per year limit per IRA account does NOT apply to conversions and recharacterizations.