late Roth conversion account segregation
Assume a client converted one asset class to one Roth account, call it asset class A. Further assume that 3 months later this account has appreciated from 100 to 110. Now they wish to diversify and invest 50 of this account in asset class B, and would like to establish a segregated account for potential recharacterization purposes. Am I correct to assume this is permissible, just that 50/110 of the 100 basis would be applied to the new account? I have seen nothing on this issue, any guidance or cite would be appreciated.
Permalink Submitted by Alan Spross on Sat, 2010-12-11 17:57
What the client should have done to utilize this strategy is to make two conversions into separate new Roth IRA accounts. Partitioning the accounts after the conversion does not accomplish the same result because both accounts originated from the same conversion. If one of these accounts was recharacterized the custodian would have to use the earnings results in both Roths because of the single conversion origination.
If the client has more TIRA assets to convert, he can still accomplish the goal by doing a new conversion into a new Roth account and purchase the B asset class. Eventually, he may choose to recharacterize half the first conversion containing A based on either the results of A OR having total conversion amounts that produce a tax bill he figures is too high to pay. But there is no particular rush to do this since he has until 10/17/2011 to act.
Now, if the first conversion was his total TIRA, he does not have other funds to do a new conversion. But he could recharacterize half of the first conversion right now, and then wait 31 days to reconvert it next year. The waiting period avoids a disallowed reconversion of the same assets. The only downside with this is that the second conversion will not be in 2010 and he will have to pay the taxes in 2011. That might make it wise for him to opt out of the deferral on the remainder of the 2010 conversion and report it all in 2010. The tax bill will be split between 2010 and 2011 instead of 2011 and 2012. But it opens up his 2012 tax bracket to do another conversion in 2012.
If all this seems too complicated, he can still do as you indicated and will have diversified his Roth investments, but the recharacterization strategy of doing more than once conversion and keeping the best one will be watered down because the partitioning of the Roth after the first conversion leaves them both in the same pool for calculating earnings for a recharacterization. He still will be able to recharacterize based on the overall results of both investments, but it’s considerably watered down compared to what he could do with two separate conversions to two Roths vrs one conversion and then partitioning the accounts.
I realize that these rules are very complex, and the various strategies or maneuvers are difficult to understand.