ROTH Conversion

Submitted by Joe Votava on Sun, 2020-04-05 14:58

Client converted a large IRA to a ROTH IRA, trustee to trustee (UBS) in early February, at the height of the market. Now would like to reverse the transaction. Client is over age 59 1/2 and is still within 60 days of having done the conversion. Could the current ROTH account simply be moved to his taxable brokerage account (no income in the ROTH) and use his own money to establish a new IRA account and put back the full amount he converted, and thus avoid the tax on the conversion? Are there any penalties associated with doing it this way?
Alternatively, can the client say this was a “mistake” and ask UBS to reverse the reporting, since no tax documents have been prepared yet? Thank you for any suggestions.



Submitted by Alan - IRA critic on Sun, 2020-04-05 16:04

Neither of those will work. A rollover contribution cannot be made from a Roth IRA to a traditional IRA, and a conversion can no longer be recharacterized. UBS cannot and will not process a recharacterization. Therefore, client’s only hope for relief rests on Congress passing additional relief measures. Reinstating recharacterizations of 2019 and 2020 conversions would be consistent with the intent of the CARES Act as it would reduce taxes in a similar manner as eliminating 2020 RMDs. However, this was apparently not considered for inclusion into the CARES Act, but there is at least a small chance that this could be a part of some future legislation. If not, client is out of luck.

Submitted by Joe Votava on Sun, 2020-04-05 21:20

Thanks for your reply —  I was not thinking of rolling the new ROTH back to the traditional IRA, but rather having the client open a new IRA (at a different custodian) and put in the full amount he had originally distributed to the ROTH.   Use his own funds for this purpose, and complete it within the 60 day rollover period.Then, UBS could simply move the new ROTH account money to his taxable brokerage account.   So not asking them to recharacterize the ROTH conversion, just disburse the ROTH funds.   Since the client is over age 59 1/2, there is no early withdrawal penalty (so no five year hold rule) and the new ROTH account will have no untaxed income because it has dropped in value. I realize these two separate steps amount to a recharacterization, but if within the 60 days and client over age 59 1/2, might it not work?  And if not, what might be the penalties for doing so?    I realize the best would be for Congress to give some relief here like they did for the RMDs. Thanks again.     

Submitted by Joe Votava on Sun, 2020-04-05 23:37

Not to belabor — I agree the reporting will take place as you describe.  But the custodian for the new IRA will also report the contibution to the new IRA.   So if/when the IRS sends a notice for underpayment, the taxpayer could show the IRS the IRA was replaced within the 60 day window.  Wouldn’t that serve to avoid any underpayment and penalties?  Or is there some other rule which would prevent this? 

Submitted by Alan - IRA critic on Sun, 2020-04-05 23:17

The Roth custodian is still going to issue a 5498 showing a large conversion contribution. The IRS will also receive a 1099R from the TIRA and a 1099R for the Roth distribution. They would have to conclude that the conversion came from the TIRA and would issue a tax due notice plus a hefty penalty for substantial underreporting of income. 

Submitted by Alan - IRA critic on Sun, 2020-04-05 23:58

I commented on the 5498 situation since the conversion transaction stands alone as the tax generator. As for the new IRA, any contribution to it must be either a regular contribution limited in amount to 7000, or a rollover contribution. The custodian’s sytems would probably not allow a contribution over 7000 unless they were told it was a rollover contribution. If so, the would also issue a 5498 reporting most likely a rollover contribution. Next year there would be 4 forms all in the same amount – 1099R from TIRA, 1099R from Roth IRA, 5498 showing conversion contribution and 5498 showing rollover TIRA contribution.  Again, the conversion contribution could not have come from the Roth IRA (already a Roth ) so it would have had to come from the TIRA 1099R distribution. The conversion would still be taxable, but in addition there would be an excess TIRA contribution subject to the excise tax if not removed. Moreover, due to obvious chaos at the IRS this year added to the normal delays in the 1099R/5498 computer matching system (5498 forms not even issued till May, 2021 for 2020), by the time the IRA got around to contacting the client, the excise taxes and penalties for this could well have mounted up to large amounts. But there still could be recharacterization relief forthcoming, but I would not guess what those chances are.

Submitted by Joe Votava on Mon, 2020-04-06 01:12

Thank You!

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