Roth recharacterization w/a gain…
Would a “recharacterization” look any different if there was a gain in the Roth instead of a loss? (A recharacterization might want to be done if income tax rates significantly increase in 2011 and 2012). Also, it is recommended to set-up a seperate Roth IRA for “conversion” dollars and not use an existing contributory Roth Ira?
Permalink Submitted by Alan Spross on Mon, 2010-04-05 17:51
You might want to recharacterize if there was a small gain, but the larger the gain the more likely you would be to pay higher taxes on the conversion. For example, if you wanted to limit your rate to the 15% federal bracket, but you went 10,000 over into the 25% bracket and had a 30% gain on your conversion, the effective rate for that 10,000 is 19.2. You would probably agree to pay 19.2% for 80.8% of tax free earnings instead of having those earnings transferred back to a TIRA.
You do not have to set up a separate account for conversions, but it eliminates the earnings calculation required for recharacterizations. You just look at the total balance and the increase from your converted amount are the gains, so the math is very limited. It eliminates having to either do the calculation yourself or ask the IRA custodian to inform you of their calculation before they process the recharacterization.