Recharacterization and taxes
My wife is 70.5 this year, 2010. If she changes her traditional IRA to a Roth IRA this year, she understands the tax consequences and payment alternatives. She understands that she has until October 15, 2011, to change her mind and reverse the action back to a traditional IRA; that is, to recharacterize. Am I right that the correct date for her to recharacterize is October 2011? If she recharacterizes in October 2011, that will be beyond the date when her RMDs are required for traditional IRAs. Would she be stuck with the 50-percent penalty for failing to take the minimum RMD in the year she is 70.5; that is, by April 15, 2011, the filing date for 2010 taxes? How does she make sure to avoid the 50-percent trap should she recharacterize because, say, the market tanks in October 2011?
Permalink Submitted by Jose Morales on Wed, 2010-09-22 15:28
Her 2010 RMD will not be eligible for conversion, therefore if any conversion takes place it should already be satisfied. Let’s say she has $15K total in her Traditional IRA and wanted to convert the full balance to a Roth. She would not be allowed to convert the entire $15K. To make it easy lets say that $1K is her RMD amount for 2010, she would only be able to convert $14K after having taken a distribution of $1K to satisfy her 2010 RMD.
Permalink Submitted by Alan Spross on Wed, 2010-09-22 17:16
In addition, if she recharacterizes after 12/31/2010 she will have to adjust the 12/31/2010 value of her traditional IRA to reflect the transfer of assets from the Roth IRA back to the TIRA. Indications of the RMD for 2011 from Form 5498 or related Notices from the IRA custodian will be incorrect as a result of the conversion, so she should be aware that the recharacterization will trigger an increased RMD in 2011.
Permalink Submitted by Douglas Broome on Wed, 2010-09-22 22:19
I failed to make one thing clear in my initial post. My wife has not yet taken her RMD for 2010, the year in which she becomes 70.5. She should be able to convert its full value to the Roth. Does this affect either answer?
Permalink Submitted by Alan Spross on Wed, 2010-09-22 22:34
urusei2 covered that situation.
She must take the full 2010 RMD PRIOR TO converting additional amounts to the Roth. If she converts first, she is still deemed to have taken her RMD, but she then rolled it over to a Roth IRA as part of the conversion. It must then be corrected in the same manner as an excess regular contribution to the Roth IRA. This is not overly costly, but adds some reporting complexity and the chance that the Roth custodian does not code it correctly.
The second answer is not affected by the 2010 RMD as it addresses how the 2011 RMD is affected by a recharacterization.