Conversion/Recharacterization: Can the net be negative?
Here’s my real case with hypothetical numbers:
Mid 2008: Converted $100k Vanguard stock fund and $10k Vanguard MM
End 2008: Recharacterized all of Stock fund
Feb 2009: Recharacterized $5k of MM
The first two items were reported on Vanguard 1099Rs (1st with 07 Dist codes and 2nd with N Dist code)
My question involves the amount to show as my final 2008 conversion number on TurboTax (which asks for a 1099R value and then allows me to indicate an actual amount converted after recharacterization).
In both cases, more was recharacterized than was converted (say $100k + $2k for case 1 and $5k + $.1k for case 2). Do I show the amount converted as:
A. $100k – $100k + $10k – $5k = $5k, or
B. $100k – $102k + $10k – $5.1k = $2.9k
I want to do (B) but it seems this option would allow a negative income from the conversion if I had done all of the MM instead of part.
Many thanks,
James
Permalink Submitted by Alan Spross on Fri, 2009-02-13 23:43
When a recharacterization is done, it is requested and reported in amounts, not in investments types. Was your conversion a single conversion that included two investments, or were they done on different days?
If done on one day, you converted 110,000. DId you ask Vanguard to recharacterize 100,000 of that conversion in 2008 and 5,000 in 2009?
If so, you are left with 5,000 as a taxable conversion on Form 8606. Neither Turbo tax or the IRS cares about investments, just amounts.
To further confuse the issue, Vanguard sometimes combines different Roth accounts in calculating earnings, ie the actual amount of dollars that is sent back to the TIRA and shown as the N coded amount of 1099R. In addition, it does not seem possible that a stock fund could have earnings gains from mid 08 to December. It had to have severe losses, and only the MM would have had a very small gain.
Can you shed some more light on the amounts you actually recharacterized of the original conversion, rather than investments, and also respond on the number of conversions.
Permalink Submitted by James Mitchell on Sat, 2009-02-14 03:05
Alan,
I think you answered by question but let me restate the parameters:
A. There were two conversions done on different dates in 2008. Both are shown on a single, combined Vanguard 1099R.
B. There was one recharacterization in 2008 for the entire amount converted in the stock fund.
C. There was one recharacterization in 2009 for half of the converted MM amount.
I understand that Vanguard chooses a very conservative method for calculating recharacterizations but we can ignore that for now.
My question is simply: In the recharacterizations, Vanguard transfers two amounts from the RIRA to the TIRA; the amount requested and a calculated amount to account for gains and losses that occurred while the funds were in the Roth. What I understood you to say in your first reply was that I only consider the recharacterization amounts requested and not the gains/losses when reporting for taxes.
Was that right?
Thanks again, James