Recharacterization loss/gain calc. involving diff’t Custods
In June 2007, Ms. Client has 2 IRAs with monies ( 2 MFs in each): Trad’l and Roth. In mid-June, she does a Roth conversion of $10,000 (involving both funds). In late June, she does a complete cust-to-cust transfer of both accounts (2 MFs in each) to a diff’t custodian (one fund in each, same fund). Then, she loses her job. Come year-end, she decides she wants to Recharacterize, in order to reduce her tax bill. In early March, the Recharacterization occurs–per instructions, the New Custodian moves $10,000 from the Roth to the Trad’l IRA.
Question: How are the earnings/losses calculated? The Old Custodian only knows what happened to the monies for the last week of June, and nothing after. The New Custodian only knows what they got after the Roth Conversion had already occurred, and can’t be responsible for any calculation before then…
Should Ms. Client simply take her best shot at estimating what occurred? Try to ascertain what the 2 funds did in the 1st week after the conversion, and then try to ascertain what the 1 fund did from July 1 to March 1? Is there an “honest effort” rule in play?
Thanks!
Permalink Submitted by Denise Appleby on Tue, 2008-04-15 16:51
Formula available here http://www.retirementdictionary.com/nia.htm
Permalink Submitted by John Chandler on Tue, 2008-04-15 18:44
That is a nice formula, but it still leaves questions for a Real Live application. Such as, the timing of the calculation. What happens when an amount is calculated today, and then the paperwork doesn’t get signed and actually processed for a week or two. In this market, the value could be up or down 3-4-5% or more in that time period. So, then, your trusty formula would no longer be right.
How is that supposed to be handled? (The Real World is a different place than the Textbook World.)
Also, if Ms. Client ALREADY recharacterized the original $10,000, and now finds that it should be, say, 3% less than that, what is the cure for THAT?
Thank you.
Permalink Submitted by Denise Appleby on Tue, 2008-04-15 20:59
[quote=”john.chandler”]That is a nice formula [/quote]
Thanks for the feedback on the formula. I can’t take credit for it though, as it was provided by the IRS in TD 9056 which is available at the same URL provided above.
[quote=”john.chandler”]What happens when an amount is calculated today, and then the paperwork doesn’t get signed and actually processed for a week or two. In this market, the value could be up or down 3-4-5% or more in that time period. So, then, your trusty formula would no longer be right. [/quote]
The calculation should be done [u][b]after [/b][/u]the paperwork has been signed. You make a good point about the market fluctuation possibly changing the value of the amount recharacterized. This is where it becomes necessary for the client and the custodian to work together. The custodians will likely be able to process the transaction as of a particular date. For instance, if the request was received on April 15, but processed on April 30, their systems should be able ‘look back’ and move the shares based on their April 15 value. If their system does not have that degree of flexibility, then they should either process such transactions on the day of receipt or recalculate the NIA on the day of processing.
[quote=”john.chandler”] (The Real World is a different place than the Textbook World.) [/quote]
[color=white]____________________________[/color]:shock: 😮
[quote=”john.chandler”] if Ms. Client ALREADY recharacterized the original $10,000, and now finds that it should be, say, 3% less than that, what is the cure for THAT?
[/quote]
Since they already moved $10,000, the calculation should still be done to determine the NIA that should have been included. If the amount that should be recharacterized is more/less than the $10,000, the fix for that has to be resolved with the custodian. Their willingness to make corrections may depend on whether the recharacterization form included an input section for the NIA and the details provided by the client.