Undo 12/07 $10K Roth IRA conversion?

1) Providing you file your 2007 return on time or file an extension, you have until 10/15/08 to recharacterize the conversion.

2) You can convert this amount again in 2008 as long as you wait 30 days from the date of recharacterization of the original conversion. However, you are not under this restriction with respect to converting a different amount. You could therefore convert a different amount or investment at this time for 2008. If you do that, it is wise to recharacterize your 2007 conversion back to a NEW IRA account to help make it clear to the IRS that your 2008 conversion was an entirely different amount than your 2007 conversion. But if you are willing to wait the 30 days beyond the recharacterization date of your 2007 conversion, you can convert the same amount again in 2008.

3) Yes. You may wish to wait to see if your investment recovers since you have several more months prior to 10/15. But if you extend your return and pay your tax based on recharacterizing and then the investment recovers and you elect NOT to recharacterize, you will have an underpayment penalty on the difference. If you recharacterize now, you will be able to complete your 2007 return as if the conversion never happened, except that the IRS recommends you attach a statement to your return explaining that the conversion reported on the 1099R was recharacterized. Also, note that any recharacterization is also accompanied by an earnings allocation of the conversion. In your case, with the large losses, the amount that would actually migrate back to the TIRA would be LESS than the converted amount, even though for tax purposes you are considered to have reversed the entire conversion.

4) IF you recharacterize now as noted above, the statement with your Form 1040 would read something like this:

“On 12/11/2007 I converted 10,076 to a Roth IRA. In xx/xx/2008 I recharacterized the entire $10,076, which was then worth $8,027 back to my traditional IRA”.

No separate forms would be needed.

Remember, if you plan to do another conversion before the 30 days are up after your 2007 recharacterization, when you recharacterize the 07 conversion, send it to a new TIRA account which will help show that you did not re convert the same amount too soon.

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You did not mention that you were subject to RMDs in the first post. Note that if you are making Roth conversions, your RMD needs to be taken out first. This also applies in the year you reach 70.5, even though your first RMD is otherwise not required prior to the following April 1st (RBD date). You can then convert additional amounts, but you cannot convert any part of the RMD itself.

You are correct about the year end balance adjustment used to determine the following year RMD amount. If there is an outstanding rollover or recharacterized conversion processed in a year following the distribution, the receiving IRA (the traditional IRA) must be increased by the amount of the recharacterized conversion including any income adjustment to determine the RMD for the year following the conversion year.

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To add to Q3
3) If the Roth IRA balance held amounts/assets in addition to the 64 shares, recharacterizing just the 64 shares may not produce the right results. Instead, you would need to perform a calculation to determine the ‘value’ of the recharacterization. That is, you would need to determine the current value ( or the value at the time the recharacterization is done ) of the $10,076. When determining this value, you need to perform the calculation based on the computation period. The Computation period is defined in TD 9056. See http://www.retirementdictionary.com/nia.htm
This means that the current value of the conversion could be more than, =to, or less than $10,076, depending on the performance of the other assets.
If the balance in the Roth was only that conversion, then a recharacterization of the entire balance is sufficient.

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Yes, the recharacterized amount must reflect the gain/loss results of the Roth IRA as a whole, not just the results of the converted assets. Therefore, a loss on the 64 shares could in theory be offset by gains in other parts of the account, but that probably did not happen. Note that you are not bound to retain these shares in the Roth before you recharacterize if going to cash in this market lets you sleep better. The nature of the investment will not affect the formula to figure the earnings gain or loss to determine the amount that gets returned to the TIRA.

With respect to the RMD calculation and the 12/31 account balance, the second Vanguard opinion is the correct one. There is nothing I can find in the Regs that requires an exact 12/31 determination, and the simpler explanation appears on p 35 of the 07 Pub 590 under “Outstanding rollovers and recharacterizations”. The amount that is actually sent back to the TIRA when you recharacterize is the amount that should be added to the 12/31 account balance. This means that if you happen to wait until October to recharacterize under the extended due date, you will not know your 2008 RMD number exactly.

As posted previously, since you cannot convert until you have taken your RMD, if you want to do more conversions you need to recharacterize and take the RMD first. Doing conversions when subject to RMDs results in a few added complexities to the already complex process.

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