ROTH recharacterization
I have the following facts that occurred during the period in which I converted my Traditional IRA to a ROTH IRA:
FMV of IRA converted to a ROTH: $500K
Current value of conversion: $550K
I have reasons why I need to recharacterize the IRA, however my question is…..If I have traded securities within the period the IRA was converted to a ROTH (gain on sale of those securities sold), can I recharacterize the entire $550K and not have a taxable transaction?
I want to ensure that the sale of securities during the conversion does not create a taxable event, since the assets within the account have changed considerably.
Thanks.
Permalink Submitted by Alan - IRA critic on Sat, 2015-06-06 18:15
Transactions done with the converted funds are not a factor other than the allocated earnings calculation. In this case, you have 50k of earnings and it does not matter whether your original holdings simply gained 10% or you replaced all of them and your account value is 550k. The earnings calculation is the same whether your gains are realized due to sales or unrealized. The entire 550k will transfer back to your TIRA, meaning that the 50k of earnings will now be in a pre tax IRA instead of a Roth and will therefore eventually be taxed. These earnings mean that the effective tax rate on your conversion is reduced 10% because you now have 10% more than you are taxed on for the conversion. Considering all this perhaps a partial recharacterization should be considered instead of a total recharacterization. Recharacterizing half will result in cutting your tax bill for the conversion by 50% and 275k will transfer back to the TIRA instead of the full 550k. You might also consider recharacterizing the amount of your conversion that falls in higher tax brackets than you want to pay, since the first dollars converted are taxed at a lower rate.