limit to number of roth conversions?
Is there a limit to the number of Roth conversions and recharacterizations in a single account? I made a $100,000 conversion on Jan. 2. The value of these investments is now about $80,000 so I would like to recharacterize this conversion. However, I want to make a $100,000 conversion this year. Should I make a new conversion before I make the recharacterization? Or can I include some of the recharacterized investments in the new conversion at their new lower prices? I don’t want to sell any of the investments. Thanks for your help and advice. ALP
Permalink Submitted by Alan Spross on Sun, 2008-09-07 00:58
Your question has some complex ramifications. Basically, you cannot do a reconversion until the following calendar year or 30 days, whichever is longer.
However, there is no limit to the number of conversions you can do for a year as long as none of them are deemed to be a reconversion not allowed under the above guidelines. The additional conversions must be for a different amount than any prior conversions, but when you are working with a number of shares rather than cash, you should take some extra steps to make sure the IRS does not consider any of the additional conversions as a reconversion of a former conversion.
If you convert cash and then recharacterize to a different TIRA account than the source accounts and then convert a different amount of cash from the original account, that process is obviously not a disallowed reconversion since the source of the first conversion is traceable back to a different TIRA account than the one that funded the second conversion.
But when you are working with shares, you are entering a gray area since the IRS has not clearly defined what they mean by the “same amount” when it comes to shares. The safest way of doing this to recharacterize the first shares back to a different TIRA, then sell the shares. Then buy a different number of shares, perhaps + or – 5% in the original IRA and convert them. Repeat that process if the second batch also tanks using a differnt TIRA to recharacterize to. This assumes that you have enough of a balance in your first TIRA to fund the purchase of different lots. Without the balance needed, you cannot use this strategy as stated.
What the above does is to make sure that each conversion comes from different funds and different shares than earlier conversions and you are also using a different number of shares. This means that you have converted both a different amount of dollars and a different amount of shares. This is some extra work, but you do not want to risk the IRS indicating that you made a failed reconversion due to the downside of that IRS finding.
As indicated, this is a complex issue. You can also add “insurance” by converting a similar stock the second time, in the same manner you would avoid a wash sale. For example if you convert Citigroup and it drops 20% and Wachovia is also down 20% for the same reasons, then reconvert using Wachovia shares. This should accomplish nearly the same result using a surrogate stock.
Permalink Submitted by al peterson on Sun, 2008-09-07 03:05
Alan, Thank you for the detailed reply. I think you answered my question. Based on your reply, here is what I propose to do if it makes sense following your advice. Since I planned to make another conversion in Jan. 2009, I will recharactize this years conversion in the next month or so and then reconvert those securities in Jan. 09. I will also do a new conversion this year using totally different securities from those recharacterized. I am in the 5th year of a 7 year (8 with the 2010 change) conversion process and this is the first I have had a need or opportunity to recharacterize. Thanks for your help. Best wishes, ALP 😀
Permalink Submitted by Alan Spross on Sun, 2008-09-07 04:01
Sounds good. Not an absolute requirement, but more obvious that you did not reconvert if you either:
1) Do the second 08 conversion prior to the recharacterization and of course make it a different dollar amount or
2) Do the recharacterization into a new or different TIRA account # than the one that is funding the conversions.
Just one of the two above should make it easy to explain that you did not do a reconversion in the same year in the unlikely situation where the IRS would inquire.
Permalink Submitted by al peterson on Sun, 2008-09-07 04:15
Alan, Thanks for the prompt and informative replies. I’ll make the second conversion before the recharacterization. That seems most straight forward. Best wishes. ALP