ROTH convestion recharachterized to traditional
A client of mine had some IRA money in a high risk hedge fund. In March of 2010 he converted it to a ROTH. In December it had lost most of its value so he recharachterized and is in the process of opening a traditional IRA to hold the asset. By the end of the month the account had actually lost all of it’s value.
He has received the 1099 for the Distribution in March. He is awaiting the form that shows the recharachterization of which he thought the value was $10,000 in mid December but has been told it was zero at year end, so what does he do here? He has already gone through the process of opening the IRA account for which he now has no asset. How does he make certain that he does not pay tax on the original conversion?
David Behr
Permalink Submitted by Alan Spross on Tue, 2011-02-15 18:09
A recharacterization can only be done by a direct transfer to the receiving IRA, which must be opened if one does not exist to receive the recharacterization. Once that is done, the recharacterization can be processed and the asset transferred to the TIRA regardless of it’s value or lack thereof. The recharacterization can only be done by direct transfer. Once completed, the tax bill for the conversion is eliminated.
Client should have both the 1099R for the original TIRA distribution that was converted AND the 1099R for the recharacterization if the recharacterization was completed by 12/31/2010. If it is completed in 2011, then the 1099R will not be issued until Jan, 2012. The client should attach an explanatory statement explaining the recharacterization so the IRS will know why he is not reporting his Roth conversion on the 2010 return.
Let me know if the recharacterization was not completed correctly, ie this asset is not yet in the traditional IRA.