Roth Segregation Strategy
In implementing a strategy whereby you convert IRA assets into multiple Roths to take advantage of the ability to recharacterize those assets that did not perform well and keep those that have performed well, some commentators have suggested segregating the assets into seperate IRAs [b]first[/b] and then covnerting them to seperate Roths. Is this suggested for compliance purposes?
Can I simply open two Roth IRA accounts ? Then convert Asset A from IRA #1 to Roth IRA #1 and Asset B from IRA #1 to Roth IRA #2 and still have the ability to recharacterize only one of the Roth IRA accounts, if so desired?
Thanks as always.
Howard
Permalink Submitted by Alan Spross on Mon, 2010-04-26 22:56
Yes, you have that ability without question if the conversions are done on different days. But you can run into problematic situations if you do indirect Roth conversions using some combination of different source accounts and distribution dates with other combinations of dates for the receiving Roth accounts.
If done on the same day, it will normally not be a problem either. But particularly for same custodian transfers, you might run into a custodian that takes the position that you really only did one conversion because you had only one distribution that day. They would then combine the earnings in both Roth IRAs in determining the amount of a recharacterization. If one had a big gain and the other a big loss, that would ruin your recharacterization strategy. There have been some past postings that suggests that Vanguard might be taking that position due to their forced combination of more than one Roth account for the earnings calculation. Partitioning the TIRA first into different accounts would help to identify each account as a separate conversion source. If you have different Roth custodians, then no problem either.
You would also insure against this problem by just doing one direct conversion per day. You will also get one 1099R for all of them if you do that rather than one 1099R for each separate TIRA account distribution. But the main issue is how the custodian is going to do the earnings calculation in a recharacterization and that is controlled by the Roth custodian, not the TIRA custodian.
Other commentators may have a different reason for this recommendation, but I suspect that the reason is not related to IRS requirements as much as to individual IRA custodian interpretations relative to what constitutes a separate conversion. A conversion is a two part process including a distribution from the TIRA or QRP followed by a contribution to a Roth IRA.