Recharacterization and re- conversion
On 1-5-2010 I converted an IRA to 2 Roth IRAs. Roth #1 was $1,000,000 and Roth #2 was $1,258,781. Today,May 12 , #1 is $1,080,000 and #2 is $1,391,000. I found that I can absorb $90,000 of income in 2010 without incurring a tax liability. I am thinking of recharacterizing #1, withdrawing $90,000 and then again converting (back) to a Roth. Question 1. can I convert in 2010 and get the advantage of splitting the income between 2011 and 2012? 2. If I recharacterize $1,080,000 what rules apply? 3. If I convert back in 2011 can it be just a part of the balance, say $500,000? Thanks in advance!
Permalink Submitted by Alan Spross on Wed, 2010-05-12 22:21
You have tremendous flexibility with these conversions. You can recharacterize all or part of each conversion and you can also opt out of the two year tax deferral if you wish and report the conversion amount that you do NOT recharacterize in 2010 to fully utilize the 90,000 amount not subject to tax.
What you cannot do is report some of your conversion in 2010 and others split between 2011 and 2012. This is an all or nothing election.
But if you have good gains in your Roth, you would be less inclined to recharacterize which would result in your gains being transferred from the Roth to the taxable TIRA account. Those dollars would therefore be changed from tax free earnings when qualified to just tax deferred amounts in a TIRA.
You should analyze your tax bill over at least a 3 year period and should assume that taxable income over 200k (250k if married) will be subject to higher tax rates in 2011 and beyond than the rate in 2010. You might find that the best move is to recharacterize the amount of your conversions that leaves you with conversion income that will fill up your lower tax brackets in 2010 plus the 90k. Then opt out of the deferral and report the remaining conversion income in 2010.
In years after 2010, you can convert new amounts that will fill up as much of your lower brackets as you wish. But you must wait until the 31st day after recharacterization to reconvert the same assets and also must wait until the following year. Therefore, as long as you recharacterize your 2010 conversion by the end of November, you can reconvert those assets right after 1/1/2011 in any amount you wish.
Permalink Submitted by David Ball on Thu, 2010-05-13 12:42
[quote=”[email protected]“]You have tremendous flexibility with these conversions. You can recharacterize all or part of each conversion and you can also opt out of the two year tax deferral if you wish and report the conversion amount that you do NOT recharacterize in 2010 to fully utilize the 90,000 amount not subject to tax.
What you cannot do is report some of your conversion in 2010 and others split between 2011 and 2012. This is an all or nothing election.
But if you have good gains in your Roth, you would be less inclined to recharacterize which would result in your gains being transferred from the Roth to the taxable TIRA account. Those dollars would therefore be changed from tax free earnings when qualified to just tax deferred amounts in a TIRA.
You should analyze your tax bill over at least a 3 year period and should assume that taxable income over 200k (250k if married) will be subject to higher tax rates in 2011 and beyond than the rate in 2010. You might find that the best move is to recharacterize the amount of your conversions that leaves you with conversion income that will fill up your lower tax brackets in 2010 plus the 90k. Then opt out of the deferral and report the remaining conversion income in 2010.
In years after 2010, you can convert new amounts that will fill up as much of your lower brackets as you wish. But you must wait until the 31st day after recharacterization to reconvert the same assets and also must wait until the following year. Therefore, as long as you recharacterize your 2010 conversion by the end of November, you can reconvert those assets right after 1/1/2011 in any amount you wish.[/quote]
Alan,
Thanks for the advice. Just to be sure I understand, You are saying I can recharacterise say $500,000 of Roth #1. Then I can withdraw the $90,000 from the regular IRA. Next year (2011) I can then convert some of the IRA to a Roth. Did I understand correctly?
Permalink Submitted by Alan Spross on Thu, 2010-05-13 20:25
Yes, you can do that, but the 90k will no longer be in an IRA at all.
If you are trying to preserve the gains you already have in the Roth, why not just recharacterize 90k instead of 500k, and then withdraw the 90k? That would leave you with around 2,169,000 converted and reportable @ half in 2011 and half in 2012 (unless tax rates rise and you opt to report the entire 2,169,000 in 2010).
Conversely, if late this year your Roth conversion has a loss instead of the current gain, you could recharacterize ALL BUT 90k. The 90k would be tax free according to your post. You could then start over in 2011 with reconversions as long as you waited at least 31 days after your recharacterization date. The 90k (less any % loss) would still be in your Roth IRA instead of your taxable account.
Granted, either way is a crap shoot because gains or loss on your conversion are very transitory and could therefore change after all your flexible deadlines have passed.
Permalink Submitted by David Ball on Thu, 2010-05-13 21:18
[quote=”[email protected]“]Yes, you can do that, but the 90k will no longer be in an IRA at all.
If you are trying to preserve the gains you already have in the Roth, why not just recharacterize 90k instead of 500k, and then withdraw the 90k? That would leave you with around 2,169,000 converted and reportable @ half in 2011 and half in 2012 (unless tax rates rise and you opt to report the entire 2,169,000 in 2010).
Conversely, if late this year your Roth conversion has a loss instead of the current gain, you could recharacterize ALL BUT 90k. The 90k would be tax free according to your post. You could then start over in 2011 with reconversions as long as you waited at least 31 days after your recharacterization date. The 90k (less any % loss) would still be in your Roth IRA instead of your taxable account.
Granted, either way is a crap shoot because gains or loss on your conversion are very transitory and could therefore change after all your flexible deadlines have passed.[/quote]
Alan, Many thanks!