Is this Roth recharacterization strategy OK?
I have never done a Roth conversion or recharacterization before. Based on what I’ve read, the following plan seems to make sense for me. But before doing it, I would be very grateful for any advice.
1) This month (Jan 2013), I plan to convert $50,000 from my IRA. I will not put it into my current Roth account #1, but into a new Roth Account #2. Putting each conversion into a separate account is said to be important to avoid complications in case you decide to undo the conversion by recharacterizing. I will owe 25% Federal tax on $50,000 = $12,500.
2) If at some point during 2013, the value of the Roth account falls to a point where recharacterizing would be beneficial, I will do this:
_____a) Let’s say the Roth account falls 20% to $40,000. I will convert an additional $40,000 from my IRA to another new Roth Account #3.
_____b) The day after the above conversion is completed, I will recharacterize the original $40,000 in Roth Account #2 back to my IRA.
_____c) The result is that instead of owing 25% Fed tax on $50,000 = $12,500, I now only owe 25% on $40,000 = $10,000, a savings of $2500. And I still have achieved my 2013 Roth conversion target.
After you recharacterize funds, the rules say you can’t reconvert the same funds until you wait either at least one month or until the next calendar year. I figure that if I do a second conversion into Roth Account #3 (step 2a) BEFORE recharacterizing the first conversion from Roth Account #2 (step 2b), I will avoid this rule and it will be very clear to the IRS that I did not reconvert the same money that I recharacterized.
Am I right about this? Will this plan be OK with the IRS?
Any advice would be much appreciated.
Permalink Submitted by Alan - IRA critic on Fri, 2013-01-11 18:25
Your plan is fine as it allows you to document to the IRS that you could not have done a disallowed reconversion. Another way of doing this is to recharacterize the first conversion to a new TIRA account, but you should not need to do both to be secure. Why is your second conversion 10,000 less? It’s best to convert a slightly different amount, but it certainly does not need to 10k less if you wanted 50k to be added to your Roth. Another widely used strategy is to do two conversions to different Roth accounts, one invested conservatively and the other with a volatile stock or ETF. Then you retain only the best performer, but since one is conservative or stable value, you will be sure to end up with at least one conversion in your Roth.