Recharacterizing Roth Conversion in kind

Submitted by Howard Hook on Tue, 2018-03-27 18:27

Taxpayer converted 1000 shares of mutual fund ABC valued at $40,000 in their IRA account in Dec 2017. Immediately prior to conversion Roth IRA was worth $200,000. On March 26, 2018 taxpayer recharacterized the Roth Conversion by transferring the 1000 shares back to the original IRA. Immediately prior to the recharacterization the Roth IRA was worth $235,000.

I’m calculating the amount of earnings or loss as follows:

$235,000- ($200,000+$40,000) / ($200,000 + $40,000) = -2.08%

-2.08% * $40,000 = $833.33 loss

Amount to be recharacterized is $40,000 – $833.33 = $39,166.67

Question – Was recharacterizing the 1,000 shares incorrect if the value of those shares on the date of recharacterization was not equal to $39,166.67

In other words, is it okay to just re-characterize the same # of shares you originally converted (assuming the value of those shares declined between the date of conversion and the date of recharacterization)?

Sorry for the convoluted question

Thanks for any help

Howard



Submitted by Alan - IRA critic on Tue, 2018-03-27 19:04

  • Howard, your math is on target. The IRA Custodian should have software that determines the exact value required for the transfer, and they generally should be provided with instructions from the client such as “fund the transfer with shares of ABC, but if ABC is not sufficient complete the transfer using shares of DEF.”  This allows the recharacterization to be completed using the assets the client prefers and also provides the custodian enough info to complete the recharcterization without defaulting to their own procedures.
  • Just recharcterizing the 1000 shares would have been OK if the conversion had been done into a new Roth that holds only the 1000 shares, because no earnings calculations would be needed. However, this conversion was done into an existing Roth holding over investments. If the 1000 shares are valued less than 39,167 then other assets will have to be transferred to bring the total value transferred up to 39,167. Likewise, if the value of the 1000 shares had exceeded 39,167, then the custodian should only transfer the number of shares needed to equal 39,167, leaving some of the ABC shares in the Roth. 

Submitted by David Mertz on Tue, 2018-03-27 21:01

  • If the share price of ABC on the date of the recharacterization is less than $39.17, transferring only 1000 shares of ABC results in less than the original $40,000 being recharacterized.
  • If the share price of ABC on the date of the recharacterization was more than $39.17, transferring 1000 shares of ABC results in the full $40,000 being recharacterized and the value transferred that is in excess of $39,166.67 constitutes a regular distribution from the Roth IRA and a regular contribution to the traditional IRA.

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