Converting to a Roth after a recharacterization
I understand that if I recharacterize a Roth IRA conversion I can’t reconvert the same funds back to a Roth IRA in the same tax year. However, if I convert one stock to a Roth IRA in January 2010, then recharacterize it all back to my T-IRA in January 2010, and then wish to make another conversion to a new Roth account (same company stock but different shares), is there a time limit that restricts this latest conversion? Thanks in advance for your response.
Permalink Submitted by Alan Spross on Thu, 2010-01-28 21:18
The reconversion restrictions refer to the reconversion of the “same amount”. The consensus definition of “same amount” is that it means an amount, regardless of the investment, that had to be derived out of the recharacterized assets. The easiest way to view this is that if you have additional assets in your TIRA that are not dependent on using recharacterized dollars, you can convert without a waiting period and this would not be viewed as a disallowed reconversion. This is best clarified by doing the second conversion prior to the recharacterization. That way the second conversion HAD TO be a different amount because the first one was still in the Roth IRA.
If you have reason not to do the second conversion prior to recharacterizing the first one, then have the recharacterization transferred to a new TIRA account so that the funds are were placed in the new account cannot be deemed to have been reconverted if there was no conversion done from that new account. You have “walled off” the first conversion and it’s recharacterization from your other TIRA assets.
Note that neither the recharacterization nor the reconversion process is dependent whatsoever on the holdings you use. You could convert stock A to a Roth, sell it in the Roth or use other Roth assets to fund the recharacterization, and then reconvert using a third investment or buy back the first one. The investment does not matter, only the tracing of the funds used to purchase that investment is material to a disallowed reconversion.
Returning to your question, I cannot tell if this would be a disallowed reconversion or not, because you did not indicate what other assets were in your TIRA all along that were never converted. While you recharacterized the conversion back to the same TIRA account that the conversion came from, you can still probably prove that the reconversion came from different assets if you have maintained sufficient assets in your original TIRA such that the first conversion was a partial conversion and you did not use any of the assets you recharacterized back to do the second conversion.
In summary, “different amount” has nothing to do with specific shares being held or transferred. The IRA custodian never reports the shares you use to the IRS on 1099R or Form 5498, only the dollar amounts of the different actions.
Hope this helps, as this is a somewhat confusing concept.