Reverse a Roth IRA conversion
Assume 1/3 of each fund in a “Traditional IRA” was converted to a ROTH last year and recharacterized (reverse the conversion) in February prior to filing taxes. Is it true that assets recharacterized to the Traditional IRA can only be reconverted back to a Roth IRA in the next tax year after the conversion, or 30 days after the recharacterization, whichever is later? Can (a different) 1/3 of the assets in this account be recharacterized this year or no funds from this account can be recharacterized until the next tax year? Can a separate Traditional IRA consisting of different assets be converted to a Roth IRA this year?
Permalink Submitted by Alan Spross on Fri, 2012-07-20 01:28
Yes, the reconversion waiting period is as you described.
I think your second question is meant to address conversions, not recharacterizations. The waiting period only applies to assets that have already been recharacterized back to a TIRA account. Certainly a different TIRA account can be converted in full or in part as it obviously holds assets that were not involved in the other conversion or recharacterization.
With respect to a second conversion from the original TIRA account that received the recharacterization transfer, that can also be done but it may be difficult to explain to the IRS that different assets were converted in the second conversion. Having a large enough TIRA balance helps because if the first conversion was only for 1/3 the assets, there obviously was another 2/3 in the IRA that were never converted and therefore would not be considered to be re converted. One solution to make it easier to show this to the IRS is to do the first recharacterization to a new TIRA account instead of back to the original one. Then a second conversion from the original IRA would obviously be different assets since the first assets are now in a separate account. The 5498 form reporting the recharacterization would show the new TIRA account number on it and the IRS should be able to connect the dots.
Note that the particular investments, ie the funds or stocks involved are immaterial. Reference to reconverting the same assets refers to the dollars involved regardless of which actual investments those dollars may have purchased or sold.
Finally, the IRS is not really active in sniffing out disallowed reconversions. I have never seen a taxpayer post inquiring how to respond to an IRS disallowed reconversion inquiry. This provision seems directed at people who convert their entire TIRA and then recharacterize rather than those who do piecemeal or incremental conversions with only a small portion of their TIRA.