recharacterizing a roth to IRA
Client coverted $4,000 of her IRA over to a Roth-IRA in January of 2008.
If we recharacterize the roth back to an IRA, how would I find out what the new value would be on $4,000 to put it back to a roth ira for a lower tax?
doug
Permalink Submitted by Alan Spross on Wed, 2008-12-03 23:42
Doug,
1) It’s just the account value if the conversion went into a new account that received no other contributions.
2) If the conversion went into an existing Roth account, then an earnings calculation needs to be done. The IRA custodian will usually do it, but it not required to. If they refuse, the client must figure the earnings. The worksheet on P 31 of Pub 590 (07 edition) can be used to do this.
If there has been a loss, then something less than $4,000 will go back to the TIRA account, but client will still be considered to have made a full recharacterization of the conversion and there will be no tax due for the conversion on the 2008 return.
Permalink Submitted by charles lore on Thu, 2008-12-04 02:57
Allan let me take a stab at what the formula should be. This is something I learned from you so please tell me if I’ve got it correct.
Assume a loss situation.
* take value of roth on the day of conversion. This includes the converted value as well
* Take the value on day of recharacterization
* divide the loss by the value on day of conversion to derive a % loss
* mulilpy the converted amount by 1 minus % loss.
* the result is the amount to put back to TIRA.
Ex. you have a 96,000 roth and convert 4,000 so the start is 100,000.
On recharacterizatin day you have 60,000. Thus you are down 40%.
4,000 x ( 1- .40) = 2,400 to put back..
????
Permalink Submitted by Alan Spross on Thu, 2008-12-04 03:43
That’s exactly right.
Permalink Submitted by [email protected] on Thu, 2008-12-04 18:44
Thank you for the info. but can u answer another important question?
If we recharacterize the Roth ira back to the trad ira by lets say dec. 10th 2008, can i send in a new coversion from the ira to the roth ira before the end of Dec 2008?
this way the client still gets to covert an amount from the Ira into the roth ira for the taxable year 2008. otherwise they do get to stop from paying taxes from the recharacterization but they lose the opportunity to convert any money over for 2008. I hope you can understand what i am trying to say?
Doug
Permalink Submitted by [email protected] on Thu, 2008-12-04 18:56
Frank/Temp will do the calculation, but i wanted to see if i did it right?
value on day of conv = $10,111.04
value on 12-3-08 (example if done on this date) = $6714.24
the loss is $3396.80,which comes to a percentage of 33.6%
you take the 33.6% off of the $4000,which comes to $1344
$1344 – $4000 = the recharacter amount of $2656?
yes/no
Thanks,
Doug