Want to convert 10 positions. Do I need 10 accounts?
Hello all.
Thank you in advance for your time.
In my IRA I have 10 positions. They are A,B,C,D,E,F,G,H,I, and J. If I convert all 10 postions to a Roth conversion account, but only A and B ascend, and the rest drop precipitously, and I want to recharaterize C,D,E,F,G,H,I,and J (but not A and B) can I do that?
We have heard that you must have 10 seperate conversion accounts. In other words I can not pick and choose which assets to recharacterize and which to not.
In closing, if I want complete control over what I recharacterize, do I need to have each asset in a seperate account?
Albert Israel, CFP, Seattle
Permalink Submitted by Alan Spross on Tue, 2010-04-06 23:06
It depends on what your strategy is, ie. how much of your total conversion do you want to retain regardless of performance and how much gain you need from the others in order to keep them and not recharacterize them.
If you combine all of them into one account and decide to recharacterize all or part, the investments would partially offset each other. If 8 of 10 drop considerably, your account will have a loss and for a full recharacterization the entire balance would go back to a TIRA. But if you want to recharacterize only half, then 50% goes back but you can select the assets you wish to make up that 50%. If your two gainers now equal half the balance, you could select them to go back to the TIRA OR you could send the other 8 which also equal 50% back to the TIRA. Of course, if any investment has poor prospects, you should simply sell it and go to cash or another investment. You would keep the holdings in the Roth that you expect would perform better in the future if you choose to retain them all.
But if you convert each holding to it’s own account, then you can select which ones to recharacterize and which ones to retain based on widely varied results. At some point, if they all had good gains, you might keep them all, even if that meant the converted amounts increased your tax rate into the next higher bracket. The losers you would probably recharacterize. But you do have more control and do not have to depend on the IRA custodian for an earnings calculation and with 10 accounts you probably would not do any partial recharacterizations. If you do not do any partials, there is no decision to be made which assets go back to the TIRA. You would simply recharacterize a certain number of the accounts as full recharacterizations.
Where you really lose control is when you convert into a Roth IRA that already has a larger balance than your conversion. Your conversion is then diluted by the performance of the entire account, so you would probably make your recharacterization decision based only on the overall performance. An earnings calculation also needs to be done and in some cases this can be complex. So this would be OK if you know in advance that you do not want to deal with the recharacterization process or earnings calculations at all since that will involve extending or amending your return if you want to take advantage of the full allowed period to recharacterize.
If you want to retain a minimum value of conversions in order to use up your current tax bracket, but retain others only if they gain 15% or more, then you might invest the minimum value in stable value investments like ST bonds or CDs. For that minimum limit there is no need for more than one conversion account. It’s the discretionary amounts that you want to control because there is a good chance you will recharacterize them, and for those you should have a separate account for each or at least a limited number of accounts. There is no right or wrong answer, but you do need to know before you convert what strategy you intend for the conversion and how labor intensive you are willing to make it.
I am somewhat surprised that IRA custodians do not charge a fee for recharacterizations, but probably none of them want to be first to do that. But once a few start it, the rest might follow very quickly.