How Much Loss Before Re-Characterizing?
If timing of paying taxes is not an issue, is there a general percentage loss that an investment needs to have to be good candidate for re-characterizing before October 17th? Person is in the highest tax bracket.
Permalink Submitted by mk foss on Thu, 2011-10-06 17:13
Whether or not you recharacterize depends on many factors in addition to the loss in the account.
If you plan to reconvert after the recharacterization, the investments could increase in value during the 30 day period.
If you are using the default and paying tax in two years, a recharacterization followed by a reconversion after 30 days will accelerate all of the tax into 2011. If you only reconvert 1/2 you have the market risk until 2012.
You may have to amend tax returns, which could be costly.
There is a risk of changes in your tax rates and circumstances in the future – maybe this is the best opportunity ever.
It’s hard to quantify all of the factors involved in a Roth conversion with a percentage asset drop.
Permalink Submitted by Alan Spross on Thu, 2011-10-06 19:18
If we assumed that all the factors listed in the last post were considered in the decision and the only variable remaining was the loss amount as of the decision date, I would throw out a very arbitrary % loss of 10% as the amount that should trigger recharacterization consideration.
For smaller % losses or if the dollar conversion is small to begin with, the hassle of recharacterization may not be worth it. The IRS frequently misses or misunderstands the explanatory statements they recommend and the 2010 options may result in additional IRS and reporting confusion. So you also need to consider if you want to go through the recharacterization processing and reporting hassle.
Remember that the decision date value of the account could dramatically change in the days or months following the decision. Your loss or gain is only locked in if you moved the investments into cash at the time of the decision date. It’s very similar to a market timing issue.