Roth Conversion mistake
Yesterday I thought I had created a second Roth into which I did a TIRA to Roth conversion. Problem is that the conversion went into the original Roth as it didn’t create the 2nd Roth I’d asked it to. The good folks at Fidelity said that conversions may not be ‘undone’ after the day of conversion.
Question: If I create the 2nd Roth and then do a direct rollover of the exact conversion amount, will I have any problems if at a later date I do a recharacterization of the 2nd Roth……or will the IRS consider the two Roths to be one big Roth for purposes of recharacterization?
Thanks
BruceM
Permalink Submitted by Alan Spross on Wed, 2010-04-14 23:44
Hi Bruce,
This is more a matter to be resolved with FIdelity, as these IRA custodians have considerable leeway in interpreting IRS Regs that are less than crystal clear. The IRS is extremely unlikely to question how they did their net allocated earnings calculation. They will just expect you to report the figures on the 1099R that is issued. TD 9056 contains the latest IRS rules for doing these earnings calculations and is attached below. There are several examples, but I did not see any relative to your particular situation.
http://www.irs.gov/pub/irs-regs/td9056.pdf
However, the general intent of these Regs is that all accounts that held the particular conversion funds should be used in determining the opening and closing balances for the earnings computation. If you did the direct transfer soon enough so that there was minimum value change in the Roth containing the conversion before the transfer, Fidelity might agree to use only the new Roth for any calculations. It may also be possible to have them do an earnings calculation prior to your transfer and then transfer the earnings adjusted amount to the new Roth. That limits the dilution of your conversion to that short period of time where you already know the results. But there is also a good chance they will refuse and simply flag both Roth accounts for determining the opening and closing balances and then you could have major divergence in the recharacterization amount vrs your original conversion.
If this is extremely important for the strategy you are using here, you might consider transferring the original conversion amount to a different Roth custodian. If you then wish to recharacterize, Fidelity will not even know about it and the new custodian would probably either use your calculations or more likely base it on just the balance you transferred to them. These firms do not cooperate on matters like this. If this were Vanguard, you definitely would be stuck with a two account combination calculation if you later recharacterized.
Permalink Submitted by BruceM on Thu, 2010-04-15 20:53
Alan
Thanks for the reply and the link.
Because I contacted them on the day of the Roth conversion, they went ahead and simply transferred the conversion amount (it was all cash) to the newly created Roth the next day.
BruceM