recharacterized
I did a roth conversion with 100 000 dollars worth of Microsoft (3,200 shares). Microsoft decreased in value, down to $88,000. So, I did a recharacterization. I brought back all 3,200 shares to my regular IRA.
From Schwab I received two 1099Rs, one showed 100,000 conversion and the other $88,000 recaharacterization. This obviously is a $12,000 difference. Will I be taxed on this $12,000. I have been led to believe that was the reason to recharacteize losing positions. I have been very careful with these 3,200 shares as I put them in a separate new account so as not to confuse the issue.
Thank you. I need help. jalcuts
Permalink Submitted by Alan Spross on Sun, 2011-03-06 17:55
You will NOT be taxed on the 12,000 difference since you did a full recharacterization of your conversion. You also will not need an 8606 to report the conversion, but should an explanatory statement with your return showing the amounts and dates of both the conversion and the recharacterization.
Since the original conversion was in 2010 and the recharacterization was in 2010 also, you are free to reconvert if you wish. A reconversion would be taxable in 2011 income.
Permalink Submitted by james larson on Sun, 2011-03-06 18:36
What a relief!!! Thanks for the quick reply. We tax payers really appreciate this site which I found on my today,s article (Don’t Forget Roth’s Forms) San Diego Union Tribune Wall Street Journal section. Thanks again.
Permalink Submitted by Andrew Schwartz on Tue, 2011-03-22 15:43
Could I get some clarification on this issue please? It has to do with whether the limitations on reconversions are strictly time based, or number of transaction based as well. That is, if the time limits are adhered to, can an account be converted, recharacterized, reconverted, recharacterized, reconverted, ad infinitum? Assume this all goes down with one account which is fully transferred each time, no partials.
“Since the original conversion was in 2010 and the recharacterization was in 2010 also, you are free to reconvert if you wish. A reconversion would be taxable in 2011 income.” So assume that reconversion is done in 2011, and then the account value drops again, so you again fully recharacterize in 2011, negating the taxable event. But you expect a big rise in account value next year, so in 2012 you reconvert again. But your timing is off, and the account value drops again, so you again recharacterize…
Is this scenario valid?
Permalink Submitted by Alan Spross on Tue, 2011-03-22 17:31
Once you are allowed to do a reconversion because you met the waiting period, that reconversion is treated in all respects as a new conversion. Therefore, this cycle could be repeated year after year with each reconversion having to meet the most recent waiting period only.
With your example, the 2011 reconversion drops in value and is recharacterized in 2011. The next reconversion cannot be done until 2012 OR 31 days after the most recent recharacterization, whichever is longer. Let’s assume the 2012 conversion recharacterization was not done until 2013. In that case, the waiting period for a 2013 reconversion is the 31 days only since you are already in the next calendar year.
Same rules would apply to partial recharacterizations or partial reconversions in the event you chose to retain part of the conversion or only reconvert part of the most recent recharacterization.