Broker doesn't know enough to get conversions right.

Submitted by Kenneth Griffith on Tue, 2016-12-06 19:33

I am getting ready to start converting my IRA’s in 2017. I will be conveting single IRA’s to multiple Roths. I want to take advantage of Recharacterization if necessary, but need to know that the brokerage will get the paperwork right. When I try and ask certain questions, they have no idea what I’m talking about. So I kneed to know exactly what to tell them to do and what paperwork they need to send me.
Questions.
1. One existing Ira(approx 100k)
2. Ten separate Roths(each to get approx 10k)

What do I get in the way of paperwork on the original ira that was converted.?

What do I get on each separate Roth?

When and if I recharacterize a couple of the Roths, how is hat reported? I.e if I recharacterize 2 of the Roths back How is the remaining 80k reported as income to the IRS.

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Permalink Submitted by Alan - IRA critic on Tue, 2016-12-06 20:04

All the conversions are added up and the 100k total will show on your 1099R just like you converted at one time. The Roth custodian will report each 10k conversion contribution on a separate Form 5498 for each Roth, but those would not be issued till May, 2018.
If you recharacterize two Roths, you will report the remaining 80k as your converted amount on Form 8606. The recharacterizations are only reported on an explanatory statement per this example: “On 2/2/2017 I converted 10k to a Roth IRA and on 3/3/2018 I recharacterized this entire conversion which was then worth 8900 back to my traditional IRA”. A similar statement for the other Roth you recharacterized. Most recharacterizations are done in the year following the conversion, so the 1099R reporting the recharacterization transfer is not issued until Jan, 2019 in this example, but coded to apply to the 2017 tax year. The only way the IRS knows you recharacterized before Jan, 2019 is by your explanatory statement with your 2017 return.
Finally, the receiving TIRA custodian for the recharacterization will issue a 5498 showing receipt of a recharacterized contribution in May, 2019. SInce you reported all this activity on your explanatory statement, you can ignore this with respect to your 2018 tax return.
It is very tricky to manage tax withholding or estimates when you do not know how much you will recharacterize until after the year ends. The choice is to pay estimates or increase withholding assuming how much of your conversion you will keep, but if you end up keeping more than you intended, you may end up with an underpayment penalty. Presently, this is not serious just a 4% interest rate.