Timing of Re-Conversions
Assume Roth conversion 1/4/10, if recharacterize 8/15/10, can’t reconvert until 2011 because of once per calendar year rule?
If wait until 8/15/11 to recharacterize, can’t reconvert until 9/15/11 because of the 30 day rule?
Thanks
Permalink Submitted by Alan Spross on Wed, 2009-11-25 19:12
Yes, your statements are correct regarding the time limit restictions for reconversions.
But they only apply to reconversions of the same amounts including assets purchased with the same dollars. If the original Roth conversion was not the total value of the TIRA or QRP plan, the time limits do not apply to the conversion of other amounts available in the plan all along that were never part of the Roth IRA. To avoid difficulty in explaining this to the IRS, it is recommended that either the second conversion be done prior to the recharacterization, or if not done prior, having the recharacterization placed in a different IRA account than the one that will fund the second conversion.
What this all means if that if your plan is to convert your entire TIRA in 2010, any amounts recharacterized later in 2010 can not become 2010 conversions at a later date. If you do a partial recharacterization in 2010, and reconvert it in 2011, your 2011 taxable income will be the sum of the reconversion plus 50% of the non recharacterized original conversion.
Permalink Submitted by Anonymous (not verified) on Wed, 2009-11-25 21:30
So is it fair to say that the rechacterization and re-conversion rules are applied separately to each Roth account (sort of like the long standing 12 month restriction on rollovers between TIRAs)?
So that it would be a good idea to set up multiple Roth accounts to hold your 2010 Roth conversions?
Thanks
Permalink Submitted by Alan Spross on Wed, 2009-11-25 22:06
While there are some similarities, the reconversion restrictions are quite different from the rollover restrictions. It should also be noted that none of the rollover restrictions apply to conversions or recharacterizations. Rollover restrictions are tied to specific accounts that either issued or received another rollover, but they can be avoided by doing direct transfers.
Reconversions are more tied to an amount that was converted previously regardless of how it or where it moved in the meantime. For example, a conversion can be done either by direct transfer or indirect rollover to a Roth, and can then be transferred to a different Roth. But if it was then recharacterized it would not be eligible for reconversion until the time limit expires. Multiple conversions can be done and each one is subject to the limitation regardless of whether the conversions all went into the same account or different Roth accounts. The earnings calculations for recharacterizations will differ between separate and combined accounts, but the reconversion time limit applies either way, and cannot be avoided based on differing account set ups. I recommended different recharacterization TIRA accounts previously just so that it could be made clearer to the IRS that the second conversion was done with different assets. It does not change the way the rules are to be applied.
The easiest way to avoid disallowed reconversions is simply to have a real large TIRA so that you would only be doing partial conversions to stay out of higher brackets. With only a small TIRA, you are likely to be doing a total conversion and that does not leave any other TIRA assets. Any recharacterization of the full conversion would trigger the time limit for reconversion because the entire TIRA had already been converted once.
Permalink Submitted by Leon Norton on Fri, 2011-02-04 16:32
I did a partial conversion of a rollover IRA on 12-7-10. I recharacterized a portion of the conversion back to the original rollover IRA on 12-31-10. I wish to further recharacterize an additional portion of the conversion in 2011. (Say 3-1-2011). If this is done, will this prevent me from doing another partial conversion from the rollover IRA in 2011? Should the recharacterization done in 2011 be done to a separate IRA instead of the original rollover IRA? Does it matter if different mutual funds are involved? (i.e. if the additional partial conversion in 2011 comes from a different mutual fund in the rollover IRA instead of the mutual fund involved in the original partial conversion/recharacterization?) Thanks for your help.
Permalink Submitted by Alan Spross on Fri, 2011-02-04 20:45
The reconversion waiting period mostly affects reconversions done in the same year as the original conversion because you cannot reconvert those assets again in that year. But your original conversion was done in 2010, therefore your 2011 waiting period is limited to 30 days after the date of recharacterization. You could reconvert from the first recharacterization done as of 1/30/11 and could reconvert funds from the second recharacterization as of 3/31/11. The 30 days starts to run on the actual date of the recharacterization.
Recharacterizing to a different (usually a new) IRA is useful in tracking the funds in case you ever need to prove to the IRS that you did not reconvert the same assets before the waiting period ended. It is just easier to identify the source of the reconversion dollars, but is not a requirement.
The actual specific investment reconverted is immaterial, as the rule applies to whatever the funds are invested in where the source dollars were from a recharacterization. There is no reason to change investments for purposes of this rule and the IRS does not even look at the actual holdings, just the flow of dollars.
Also, the reconversion limitations do NOT affect the conversion of different assets than were recharacterized. Therefore, these rules mostly affect people who have only one TIRA and convert the entire account. They have no different assets left in their TIRA or other TIRAs and therefore any reconversions HAD to come from recharacterized assets.