Roth Conversion/Recharacterizaion
Hi there – here is what occured.
10/07 we converted a T. IRA valued at 121,146 to a Roth IRA. We withheld $30,253 for taxes.
Client did her taxes and due to some capital gains exceed the income limit to convert to a Roth. We now need to recharacterize it.
The starting value of the Roth was $90,892 – it is now worth $75,600.
What are the considerations I should be reviewing while recharaterizing this IRA?
Can the client claim the $15k loss?
Thank you – J
Permalink Submitted by Alan Spross on Thu, 2008-03-13 03:32
With nearly a 20% loss, many people would consider recharacterizing merely to avoid taxes on the phantom value. However, in this case there is no choice, and they may possibly be due to the withholding. Generally, a conversion should only be done if the taxpayer has funds other than IRA funds from which to pay the taxes, perhaps by quarterly estimates.
Of course, only the remaining Roth funds need to return to the TIRA for the required full recharacterization. But the worst of this is the withholding because these funds have permanently lost tax deferral. In addition, the early withdrawal penalty may apply to the withholding.
Since the loss occurred while in an IRA, you cannot deduct it. If this was the client’s only Roth, even though it will be terminated, it is being done by recharacterization, ie the loss is transferred back to the traditional IRA, not realized, so this loss cannot be considered for a misc itemized deduction.