partial ROTH recharacterization
Client has filed an extension for tax year2010.
Converted $310,000 in Dec of 2010. Now wants to recharacterize $150,000 – ??? Heard perhaps that a partial recharacterizaton will NOT let him use the default method and he must pay all the tax due in one year – can anyone confirm that it must be done this manner or he can still chose to use default and pay 1/2 in 2011 and 1/2 in 2012 ??
Irene
Permalink Submitted by Alan Spross on Wed, 2011-04-27 18:13
The tax deferral options do not become permanent until 10/17, the extended due date. Therefore, a partial recharacterization can be done and the remaining conversion will still have the tax year option elected.
If someone wants to use their 2010 bracket, an option is to recharacterize 2/3 of the conversion and report the 1/3 in 2010 and then do additional conversions in 2011 and 2012, thereby using the marginal bracket in all 3 years.
But the earnings gains on the conversion should also be factored into the decision because if the conversion has good gains, recharacterizing will result in the earnings allocated to the amount being recharacterized migrating to the TIRA and eventually being taxed, vrs remaining in the Roth.
But if client just wants to reduce the 2010 conversion and split the income between 2011 and 2012, that can be done. The recharacterization should be requested in mid to late September to allow time to get the return done by 10/17. An explanatory statement should be included showing the date and amounts of the recharacterization so the IRS will know why the reported conversion is less than shown on the 1099R. If client then wants to reconvert this amount in 2011, they must wait 31 days after the recharacterization is processed.
Permalink Submitted by Irene Thompson on Wed, 2011-04-27 18:22
This is certainly the answer I wanted to see, but can you back your posting with where I may obtain this supported in print, besides the pub 590 generalization??
Permalink Submitted by Alan Spross on Wed, 2011-04-27 19:09
There is no single provision that ties all these variables together. This link is to the Section of TIPRA that provided for the 2010 Roth conversions. You will see that it is very short and only amends existing tax law where changes were made. No changes were made to the recharacterization provisions that have existed much longer and are covered in the IRS Regs. The only thing that changed is that the income limits and marital filing status requirements are gone and for 2010 only the conversion income can be deferred.
http://thomas.loc.gov/cgi-bin/query/F?c109:6:./temp/~c109bJBgVl:e64272: