Recharacterization Of a Direct Roth Conversion
I’m back again. Lets say a client directly converts his 401(k) to a Roth in 2010, deferring taxes to 2011 & 2012. If Nancy and the pips raise taxes to 50% in 2011, can the Roth be recharacterized to a TIRA by 10/15/2011, even though it was never in a TIRA? Or should he roll the QRP to a TIRA first, then convert to a Roth, to be on the safe side?
Permalink Submitted by Alan Spross on Mon, 2009-10-26 22:07
Hi, Al.
You are correct. The recharacterization will have to go to a TIRA as it cannot go back to a QRP. Recharacterization and conversion activity is not allowed within a QRP either because Congress did not want to require it or plan administrators did not want any part of it. There is also none of this activity between a Roth 401k and pre tax 401k accounts, ie no conversions or retroactive recharacterization of regular contributions.
There is no reason to avoid direct conversions because of this, since the requirement to set up a TIRA to receive recharacterized funds already exists within the IRA environment due to IRA to IRA conversion recharacterization requirements of the recent past. The Roth custodian would be the most likely one to set up the TIRA account to accept the recharacterization.
It would be preferable to convert to a Roth IRA from the account which has the highest portion of basis in it, either a TIRA per Form 8606 or a QRP that holds after tax funds. This gets more dollars to the Roth IRA faster for the same tax bill or the same amount of dollars for a lower tax bill. But a frustrating area of confusion now is the lack of an IRA ruling regarding the ability to select after tax QRP assets for the Roth while sending all the pre tax amounts to a TIRA. I suspect that the pro rate rules apply to these direct conversions, effectively requiring the pro rate rules for direct conversions in the same fashion that the 8606 directs TIRA conversion by calculating the taxable amounts. The IRS needs to understand that the entire QRP is not required to go a TIRA OR a Roth, but there is a real demand to roll pre tax amounts only to a TIRA and basis only to a Roth IRA, that is a bifurcated distribution.
Permalink Submitted by Al Fry on Mon, 2009-10-26 23:45
Fortunately (or unfortionately, as the case may be), I find very few QRPs with after-tax money in them, except for the PS-58 costs, when life insurance was involved. I guess the people I worked with never had enough money to exceed the deductible ammounts.