When to decide if converted Roth IRA should be undone
I converted two TIRAs to Roth IRAs at the end of March. Now that account value is lower than it was on the conversion date. But it might be more or less towards the end of the year. When is a good time to compare the value of the account to the conversion value, and make a decision on recharacterizing the account? Also, if it is recharacterized, can it be converted back to a Roth in 2011 (after the 31 day waiting period)? Does the special 2010 conversion income limit apply to this reconversion in 2011, or do the previous income limits apply?
Thanks.
George
Permalink Submitted by Alan Spross on Sun, 2010-05-23 23:10
Income limits for Roth conversions are now history. The only thing different about 2010 conversions than years after 2010 is the ability to report the conversion income over a two year deferral period. Therefore, you can reconvert a recharacterized amount in 2010 in 2011 or after 31 days, whichever is longer. Also, note that you can convert different assets at anytime, ie assets that have been in your TIRA all along and were not converted at all in 2010.
For the above reasons, the timing considerations for a recharacterization are different if you have other assets to convert vrs having to wait to reconvert the same assets.
If you have to wait until 2011 to reconvert, then you might delay the recharacterization to see if the investments will recover, and you will still have the two year deferral. If the market continues downward, you will have the same losses in either IRA, but as long as you DO recharacterize by the extended due date you will eliminate the tax bill. There is no particular benefit to recharacterizing at the first downtrend when the option will remain open for several more months.
Finally, you can always change your investments in either IRA type to protect yourself against another bear market if that is what you expect. A large loss of principal with a lower resulting tax bill is always worse than a large tax bill on a large gain of principal. Now, if you sell your stocks in the Roth and do not intend to re establish these investments in time to make back the losses, you know you need to recharacterize sooner or later. But if you intend to stay the course with your investments, then you should give your conversion some more time before you give up on it.
Permalink Submitted by George Hansen on Wed, 2010-05-26 05:54
Thank you for informing me that the income limits on Roth Conversions that applied pre-2010 do not apply beyond 2010. I was not aware of that. In my case all of my TIRA assets were converted to Roth IRA in March 2010, so I assume your comments about other assets to convert will not apply. And I do not intend to take the 2011/2012 deferral on taxes. I guess that means I can wait until early next year (April 15th minus 31 days plus some breathing room) to make a decision about recharactization. Did I understand you correctly?
Thanks again.
George
Permalink Submitted by Alan Spross on Wed, 2010-05-26 19:45
Not exactly.
You have until the extended due date of 10/17/2011 to recharacterize your 2010 conversion. But to use the extended due date you must either file your return or request an extension by 4/15/2011. If you neither file or request extension by 4/15, then 4/15 is also the deadline to recharacterize. What this all means is that if you want to avoid an extension or an amended return, effectively your deadline to recharacterize is 4/15.
Once you recharacterize a 2010 conversion in 2011, you must wait at least 31 days before re converting the same assets. The reconversion would be taxable in 2011, the year you actually did the reconversion.
To cut down on reporting, you might want to wait until just before you start your tax return for 2010, but if you do not mind extending your return, you would have another 6 months or so before having to decide if you want to recharacterize or not.