Recharacterization Tax Implications
I made several conversions in 2009 from a Rollover IRA to a new Roth IRA. I have not been able to figure the tax implications if I recharacterize some of the conversions rather than all the conversions and Fidelity doesn’t seem willing to help. I made the following conversions:
Jan 2, 2009 8000 sh Stock A $8.20/sh Total $65,600
Jan 2, 2009 4700 sh Stock B $0.40/sh Total $ 1,880
Mar 4, 2009 8000 sh Stock A $3.34/sh Total $27,054
Oct 10, 2009 16000 sh Stock C $0.37/sh Total $5,920
The current values of each stock are:
Stock A = $2.72/sh Total $43,520
Stock B = $1.52/sh Total $7,144
Stock C = $0.40/sh Total $6,400
I would like to recharacterize the 2 conversions done in stock A and keep the conversions of Stock B & C, if it is advantageous to do so. I have another account with another broker where I converted one stock and I plan to recharacterize that entire account. I also have a third account in my wife’s name in which the conversion worked out well.
Thanks to anyone willing to help me with this question.
Permalink Submitted by Alan Spross on Tue, 2009-11-24 18:25
First, note that you can technically recharacterize specific conversions only, and that determines the dollar value that goes back to the TIRA. To meet this dollar value, you can use any current assets that exist in the Roth IRA. You can recharacterize the Stock A conversions, but the earnings calculation will vary based on the following:
1) Did Fidelity process the Jan 2 conversions as separate conversions or as a single conversion?
2) Since you apparently converted into a single Roth account, the earnings calculation must include the investment gains or losses of ALL conversions held in this Roth IRA. This means that the losses from A will be partially offset by the gains in B and C. Those gains in B and C are going to result in having to transfer some of B or C back to the TIRA because the value of A is not high enough to completely fund the recharacterization.
There is a worksheet on p 31 of Pub 590 you can use to determine the dollar value that must be recharacterized. After determining the amount that must be recharaterized, you must give Fidelity a manageable instruction to use. For example, ” Recharacterize the conversions of 1/2 (A only if possible) and 3/4 using shares of A. To the extent needed to complete the transfer, use shares of B before C.” Note that you are not limited to A, B or C. If you have cash in the account, you can use cash if you want to.
If you think that A is going to recover and you have other investments in the Roth that you are less confident about, you can recharacterize the original conversion using cash or other investments, and leave A in the Roth. When A recovers, better it be in the Roth rather than the TIRA. Of course, you must fulfill the dollar amount of the recharacterization and the assets you choose are limited to those you currently have and their relative values.
In the future, the process is simplified if you do each conversion into a separate Roth IRA account. It eliminates the calculations when you recharacterize, and also allows you to better select the profitable conversions from the losers.