Roth IRA re-characterization
1. Is a re characterization based on the dollars of the stock shares or stock shares only? – Here is my situation: in 2010, I moved 10,000 shares of company ABC stock in my traditional IRA to a newly opened Roth IRA (My Roth account was credited 10,000 shares (not dollars value), since I did not sell the stock when I did the transfer). My expected hope at that time was that the stock would appreciate in value within a year, then I could pay tax on the 10,000 shares valued at the time of the conversion to Roth and would realize a gain without a tax burden in Roth IRA. Unfortunately for me, the stock price did not go up but declined substantially. As a result, I requested my brokerage service to re convert (or re characterize) 10,000 shares of ABC from Roth to traditional IRA in April of the following year 2011. The re characterization was completed successfully. However, my brokerage service firm reported the IRA conversion in $ amount (but not the # of shares). Since the $ value of 10,000 shares at the time of re characterization done in April 2011 was substantially less than the value at the time of moving from Traditional IRA to Roth IRA in 2010. Do I owe tax on the difference of the $ values? Was my re characterization of 10,000 shares completed correctly without tax consequence? I would like to stress that I did not trade the stock during the entire time the stock was in my Roth IRA. I just simply move 10,000 shares from Traditional IRA to Roth and revert them back from Roth to traditional IRA.
2. My second question is how many times can I move back and forth between Roth and Traditional IRA just like I did in 2010 and 2011? Is there any rule that limits the number of conversion from Roth-to-traditional IRA’s (and re characterization) in 1 year or in one’s lifetime?
Permalink Submitted by Alan Spross on Thu, 2012-05-03 16:46
1) All Roth conversions and recharacterizations are reported in dollars. If you tell the custodian the number of shares you want converted they will report the value of those shares on the 1099R and you must report that value in your income. When you recharacterize, you should request the recharacterization in terms of the dollar amount of your original conversion you want recharacterized.
In your situation, you converted into a new Roth IRA rather than an existing Roth. A full recharacterization of such a conversion is simple in that no earnings calculation must be done to calculate the investment results of the entire Roth since the Roth does not hold anything other than your conversion. Therefore, this Roth IRA presently should have a -0- balance, and the reduced value of those shares is now back in your TIRA account. You have eliminated the tax bill on your conversion. I assume that there were no dividends paid on the stock while it was in your Roth IRA.
2) There is a time limit to reconvert the same assets. That time limit is either 30 days from the recharacterization date or Jan 1 of the year following the conversion, whichever is longer. Since your other conversion was in 2010 and you recharacterized it April, 2011, you could have reconverted 30 days after the April recharacterization. You did not have to wait until 2012 because your recharacterized conversion was a 2010 conversion, not a 2011 conversion. This is the only waiting period and it only applies when reconverting the same assets. People with large IRAs that do partial conversions can convert other amounts in their IRA without a waiting period.
Note that you must report your activity on your tax returns when you recharacterize. For 2010 you should have filed Form 8606 to report your conversion, unless you filed after you recharacterized it. If you filed after you recharacterized the conversion, you did not need an 8606, but should have included an explanatory statement with your 2010 return indicating the dates and amounts of both the conversion and the date and amount of the recharacterization and how much is was worth when transferred back to the TIRA. Neither you or the IRS received the 1099R for the recharacterization until January, 2012 but that 1099R should have been coded to indicate that you recharacterized a 2010 conversion. Since this all applied to 2010, your 2011 return does not have to reflect anything further about this recharacterization.
If you don’t include explanatory statements, the IRS may have trouble understanding what you did and how much of your conversion is recharacterized.