Multiple Roth conversions
In January 2010 a client converted his IRA in 10 separate Roth IRAs. As year end approaches, he is considering recharacterizing 4 of the Roths back to the original IRA. In 2011,(30 days + new calendar year) he will again convert the IRA to several Roth IRA’s.
Questions
1. Is there any problem with putting the four Roths being recharacterized back into the single original IRA?
2. Any problem with separate reconversions in 2011?
3. For those 2010 Roth conversions, that were not recharacterized – if they decline in value and the client wants to recharacterize prior to October 15, 2011 (assuming proper extension) is there a probem recharacterizing back to the original IRA (since this original IRA has now had other funds converting to a Roth IRA in 2011).
Permalink Submitted by Alan Spross on Wed, 2010-10-27 19:21
1. Is there any problem with putting the four Roths being recharacterized back into the single original IRA?
The only function of creating new TIRAs for recharacterizations is to help document that no disallowed reconversion was done and in organizing the accounts to prevent this error in the first place . In this case, since the client is obviously pursuing a strategy of rolling recharacterizations and reconverions, and because market volatility is unpredictable in creating opportunities, it is preferable to start placing all recharacterizations done in 2010 in a new TIRA labeled TIRA 2; recharacterizations of 2010 conversions done in 2011 in TIRA 3, recharacterizations of 2011 conversions done in 2011 in TIRA 4 and done in 2012 in TIRA 5 etc . Each IRA should be clearly limited to these respective sources and documented in some fashion with a date that is safe to reconvert from that IRA. Eg TIRA 2 can be reconverted safely in Feb, 2011; TIRA 3 can be reconverted on the 31st day after the last recharacterization received in this TIRA; TIRA 4 can be reconverted Feb, 2012, etc. This setup will enable the lowest TIRA # to be fully converted before proceeding to the next one, and the oldest ones will be emptied first, eventually all of them. It also will enable max flexibility including values ranging from 100% in a TIRA to 100% in a Roth. When client’s conversion program ends, he can consolidate accounts again by direct transfers.
2. Any problem with separate reconversions in 2011?
No, as long as the waiting period is completed, and using the plan above (or similar plan) will eliminate chances of premature reconversions. Note that reconversions in 2011 are treated in all respects as 2011 conversions and can be recharacterized up to 10/15/2012.
3. For those 2010 Roth conversions, that were not recharacterized – if they decline in value and the client wants to recharacterize prior to October 15, 2011 (assuming proper extension) is there a probem recharacterizing back to the original IRA (since this original IRA has now had other funds converting to a Roth IRA in 2011).
Again, would recommend following plan above or similar plan. The IRS has rarely investigated the timing of reconversions, but the spike in 2010 activity and use of various strategies by high balance IRA owners might trigger greater IRS oversight in this area. Since this client converted his entire IRA and left no TIRA balances behind, disallowed reconversions are more likely to occur. A client only doing small incremental conversions of a small portion of his IRA would not need to bother with the above since he could easily show that new assets are being converted, not any that had been recharacterized.