Roth Recharacterzation at a new company
Hi,
I have a client situation for this year. My client, single, has an income of about 75k and we did a roth conversion of a 46k IRA at American Funds for 2008. After the conversion was completed the newly converted account was moved to a managed account at a new investment company. The Client neglected to say that she received some money from a stock buy out that pushed her income up to 105k for 2008. She is now in the situation of not being able to do the roth conversion due to being over the 100k limit, and will have a penalty for over contribution to an IRA. She has not yet filed her taxes for 2008.
Does anyone know if we are going to run into any issues recharacterizing the roth at the new company? Also what is the protocol that we need to follow to make sure we have our ducks in a row when the IRS comes calling? Will the new managed account company issue a updated 1099 for 2008 and should we wait for that to file the taxes? And finally, since her income will be low enough to convert this year, is there a waiting period we should follow before re converting the IRA to a Roth? (we have already discussed waiting til 2010, and are concerned the tax rates will go up by then.)
Thanks for your help.
JEC
Permalink Submitted by Anonymous (not verified) on Tue, 2009-02-24 01:17
The new company should set up a traditional IRA account to receive the recharacterization. If the managed account held ONLY the converted assets, there is no calculation needed to determine the allocated earnings. The entire balance would be transferred to a traditional IRA and a 1099R reporting the recharacterization will be issued next January, so you cannot wait for it to be issued.
The 2008 return can be completed using the recharacterization statement from the IRA custodian. Sometimes this can be viewed on line if there is on line access. There will be no conversion reported on the 2008 return, however there should be an explanatory statement added to the return describing the date and amount of the conversion, that there was a total recharacterization, that was then worth $x and the date of that rechacterization. Since all of this will be reported for 2008, there is no further reporting needed for the 2009 return, even though the 1099R will come out next January.
To reconvert the same account, she must wait 31 days after the date of recharacterization to avoid a failed reconversion. The new conversion will be reported and taxed for 2009.
Even if her income allowed the 2008 conversion, she has likely experienced losses in the conversion that would result in recharacterizing anyway. When she reconverts the lower amount, the tax bill will be less than what she would have paid in 2008.
Permalink Submitted by Anonymous (not verified) on Tue, 2009-02-24 17:06
Thanks for the informative response Alan!
JEC