Roth Recharacterization
I had someone ask me this questions and I’m not sure if I’m fully capable of answering it. They are looking to find the answer about the value of a converted Roth IRA when trading is done in the account after the conversion and a subsequent recharacterization. Here he outlines the situation with subsequent questions.
I converted $100,000K that is invested in mutual fund AA from a traditional IRA to a Roth IRA on August 20, 2010. If I trade in the ROTH account and sell fund AA and purchase fund XX and fund AA (the fund I owned at the time of the conversion) is valued at $110,000K on December 31 and the value of fund XX (the fund I purchased after converting to the ROTH and own on December 31) is $80,000K which is a $20,000K loss I would want to recharacterize.
Three questions:
1. Are there any restrictions about trading in a ROTH conversion account?
[i]This was is obviously no, right? [/i]
2. In the case I outline above, is my conclusion that the account is valued at $8K correct because that is the value of the fund that I own on December 31 or would the IRS still require I value the account with the fund (investment) I owned at the time of the conversion?
3. Also, in reference to the case above, if I did a recharacterization on Janaury 2 would the amount that was moved back to the traditional IRA go to fund AA or XX?
Permalink Submitted by Alan Spross on Thu, 2010-08-26 16:13
1) Agree. There are no restictions.
2) Valued at 80k. Individual holdings do not matter, only the current value of whatever is held at the time of recharacterization.
3) When you recharacterize, since the process can only be done by a direct transfer, the Roth investments are simply transferred in kind to a TIRA account. You can then change the investments if you wish.
If you converted into an existing Roth IRA that holds several different investments in addition to those you converted, when you recharacterize you can select any of the total investments as long as the value equals the amount you wish to recharacterize adjusted for earnings or losses. The most expedient way to do that is to tell the Roth custodian which investments you wish to use. Since the investments constantly change in value, you would provide an instruction similar to the following: “Recharacterize x% of the conversion dated yy/yy/2010. Transfer shares of 50% of the shares of Fund A and 50% of the shares of Fund B back to the TIRA and if that is insufficient use Fund C to complete the recharacterization.”
Investments with the best near term prospects would stay in the Roth, and the others should be used to complete the recharacterization. Bottom line, you prefer that gains occur in your Roth vrs your TIRA.
Obviously, if you converted into a new Roth account and are doing a full recharacterization, then all the assets must move back to the TIRA. No selection is necessary.