Roth IRA Recharacterization
If I convert two or more individual stock holdings from my T-IRA to my Roth IRA (e.g., XOM, BRK-B) in a given year, and then wish to recharacterize only one of them, can I do this, or must I recharacterization all or none of them in a given year? More specifically, I converted two stocks to a Roth in early January, 2010. One has increased significantly and the other has decreased significantly. I would like to make another Roth conversion now of that stock which has decreased in price and then recharacterize my earlier conversion of that same stock which I converted at a higher price. Can I do this while leaving the other company stock in the Roth unchanged? Thanks in advance for your response!
Permalink Submitted by Alan Spross on Wed, 2010-01-27 21:08
It sounds like two stocks were converted in the same January conversion into a single Roth IRA that already held other assets. Is this the case?
Permalink Submitted by Marvin Rotenberg on Wed, 2010-01-27 21:24
If both stocks were converted to the same Roth IRA, then you can not cherry pick just one stock. Each stock would have to be converted to a separate Roth IRA, with no other assets in that Roth IRA, in order to cherry pick an individual position.
Marvin
Permalink Submitted by Dan Gibbs on Thu, 2010-01-28 20:20
Yes, two stocks were converted in the same January 2010 conversion into a single Roth IRA BUT that Roth account held no other assets. I opened the Roth IRA account in late ’09 or early ’10 in preparation for the January ’10 conversion. However, it appears that the second response to my question (by Marvin) says that I can’t cherry pick just one stock regardless of whether or not my Roth held other assets at the time of the conversion. Is this a correct assumption? Thanks for your response.
Permalink Submitted by Alan Spross on Thu, 2010-01-28 21:43
No, it is not correct.
Please review my post on your other thread that dealt with your proposed reconversion, and the concept that the specific holdings you use do not matter. And if they DID matter, you could easily get around the issue by selling the shares, recharacterizing cash, and then rebuying the same shares in the other account.
One aspect of your recent Roth conversion is that you had one stock that gained while another lost. The investment experience of the entire Roth even including other holdings you held all along must be used to determine the dollar amount of your recharacterization. Since this was apparently a new Roth, it probably held only these two issues. If the gains and losses all cancelled each other out, your recharacterization would be in the same amount as your conversion. If the account had a gain, you must transfer MORE than your conversion back to the TIRA, and if the Roth had an overall loss during the conversion holding period, then you would transfer LESS than your conversion back to the TIRA. The IRA custodian will usually do this earnings calculation for you, but they are not required to. Once the amount that you must recharacterize is calculated, you can use ANY of the holdings in your Roth to transfer back. This is your choice, but you must figure a way to communicate your choice to the IRA custodian. Eg. after determining the share values, you might tell the custodian to use shares of “A” and if that is not enough, then use shares of “Z” to complete the recharacterization. Of course, you can also use MM funds and then there is less math required. In this case, if the gains and losses offset each other, you do not have enough shares of the losing stock to fund the recharacterization. You would have to use all the shares of the losing stock and then some of the winners in order to meet the dollar amount that must be recharacterized.
Therefore, you actually CAN cherry pick what assets you want to recharacterize from all the holding in your Roth IRA. What you want to do is retain assets with the best potential for gains in your Roth and recharacterize the others. Better to have losses in your TIRA rather than your Roth. But since you can buy and sell for a modest commission in both accounts, all we are talking about here is the modest commission you save by not having to buy and sell in the various IRA accounts.
If you are using a conversion strategy that expects recharacterization of the worst performers, then you should do separate conversion into different Roth accounts so that the results are separate and do not offset. Then you can simply recharacterize the entire losing Roth account balance and leave the winner intact. In your case here, I question whether you should even recharacterize now since your loser and winner offset in the same account and you have over a year and a half left to recharacterize. If you do this too often, you will lose control of the entire process. Since you have plenty of time, I would back off doing anything now until you get a handle on the entire process and all the complex issues.