Roth conversion-60 day rule
My client converted an IRA account to a Roth last December. In March 2007, he realized that the tax consequences were to high. He then reconverted the Roth back to an IRA, which the custodian allowed. He is clearly past the 60 day rule. Will this be allowed? Does he need to pay the taxes? Thank you for your assistance.
Permalink Submitted by Denise Appleby on Tue, 2007-09-04 17:43
I think you meant to say he recharacterized the amount (back) to his traditional IRA- right?
The deadline to recharacterize a 2006 conversion is the individual’s tax filing deadline, including extensions . Individuals who file their return by April 15, receive an automatic 6-months extension to recharacterize…usually to October 15, which means he would have until October 15, 2007 to recharacterize the 2006 conversion. In sum, he is within the deadline. See http://www.retirementdictionary.com/Recharacterization.htm
Permalink Submitted by Alan Spross on Tue, 2007-09-04 18:05
In addition, a recharaterization is NOT considered a rollover even if the conversion amount would have been a rollover if it had been contributed to a TIRA instead of a Roth.
So there is no problem here, although a statement should be attached to the 2006 return or amended return to explain the recharacterization. The statement should read approximately as follows:
“On 12/x/06 I converted $a to a Roth IRA. Subsequently, on March y, 2007 I recharacterized the entire amount of the conversion which was then valued at $b back to my traditional IRA.”
I hope that the earnings while in the Roth were considered prior to recharacterizing, since the process includes sending what are potentially tax free earnings back to the TIRA where they will be subject to tax when distributed or re converted. If the earnings are considerable, the true tax rate for the conversion is effectively reduced.