Roth Conversion/Recharacterization Questions

Submitted by Seth Poppel on Tue, 2014-08-05 08:47

1.) I converted to a Roth on January 3, 2013 and have to decide by October 10, 2014 or so (with return due on October 15) whether to recharacterize back to a conventional IRA. IF I should recharacterize as the law currently stands I believe that I may then again convert to a Roth in January 2015 with a recharacterization deadline, once again, around October 10 of 2016.

Is this assumption correct??

2.) If I convert to a Roth in January of 2015 (given the current laws governing recharacterization and taxation etc.) is it possible (or what do you feel is the possibility) that any law might be passed before October of 2016 that would either:

a.) Not allow a recharacterization in 2016
b.) Disallow retroactively the conversion to the Roth I made in January of 2015
c.) Aside from any normal tax increase on top brackets and income, provide specific additional
penalties on the conversion, which would be on my 2015 tax return when filed in October 2016??

Thank you!



Submitted by Alan - IRA critic on Tue, 2014-08-05 17:40

  1.  Since your conversion was in 2013, if you recharacterize it before the extended due date, you only have to wait 30 days before reconverting amounts attributable to the recharacterized funds. You do not have to wait until 2015. I assume you filed an extension on time (4/15) in order to use the extended due date. I would order the recharacterization no later than 10/1 in order to give you time for it to be completed AND to complete your extended return by 10/15 including an explanatory statement regarding the conversion and recharacterization of that conversion.
  2. You can reconvert 31 days after the recharacterization is processed. No chance 2a would occur for conversions already completed, no chance for 2b to happen, and no chance for additional penalties on conversions. If you reconvert in 2014, you would of course report the conversion on your 2014 return.

 

Submitted by Seth Poppel on Tue, 2014-08-05 19:28

Much appreciated.

Submitted by Seth Poppel on Wed, 2014-09-24 20:36

As per the above thread, I AM going to recharacterize and will inform Schwab tomorrow.  I intend to again convert after January 1.  I was 70 1/2 in 2014.  Based on a prior set of q & a I believe you indicated that I will need to take an RMD for 2014 AND 2015 (since that distribution would be required BEFORE I convert again in 2015)…just to clarify:a.) The amount of the RMD for 2014 will be based on the sum of the value of all of my TIRA accounts (as though the one I am recharacterizing WAS a TIRA on the valuation date) as of December 31, 2013?b.) I may take that 2014 RMD and time up till April 1, 2015, but it is taxable on my 2014 return?c.) I must take an RMD based on the account value at December 31, 2014 if I am going to convert to a Rothon January 5, 2015?  However, physically can that RMD also be taken till April 1 of 2016??d.) When I recharacterize there will be a token amount that was in my Roth previously (as I will want to recharacterize the full amount that I originally converted to keep book-keeping simple)…but keeping that token amount in the Roth will still keep it “seasoned”?e.) What do your tables show for what my minimum RMD % should be if I turned 70 1/2 on September 17. 2014? Thank you again!!  

Submitted by Alan - IRA critic on Wed, 2014-09-24 21:14

Seth, yes you must take out your full 2014 RMD before doing any conversion in 2014, and you must also take out your 2015 RMD before doing any conversion in 2015, etc. You can reconvert on the 31st day after your recharacterization if you want to. You do not have to wait until 2015 to reconvert.

  1. a) Yes, the amount of funds that actually transfers back to the TIRA (that includes gains or losses on your conversion) must be added to the actual 12/31/2013 value to get the revised value to determine your 2014 RMD.
  2. b) See note above regarding the RMD you must take before converting in any year. Your RMD options therefore depend on when you want to do your next conversion, 2014 or 2015. You can only postpone your 2014 RMD to 2015 if you do NOT convert anything in 2014. Then you must also take your 2015 RMD before converting anything in 2015. RMDs are taxable in the year that you actually take them, so if you do not convert this year and postpone your 2014 RMD to 2015, your 2014 RMD will be taxable in 2015, not 2014.
  3. c) If you are going to convert on 1/5/2015, you must complete both your 2014 RMD and 2015 RMD before doing that conversion. When taking those RMDs, the 2014 RMD is based on the revised 12/31/2013 value and the 2015 RMD is based on the 12/31/2014 value. You only have the option to extend your first RMD to 4/1. For 2015 and all other RMDs thereafter you must take the RMD by 12/31 of that year. The 4/1 option only applies to your first RMD year.
  4. d) You do not even need to have anything left in your Roth IRA. The year you made your first Roth contribution of any kind remains the year used to determine when you will have met the 5 year holding period. Once your Roth is qualified, it stays that way even if you empty it and then start anew.
  5. e) You will still be 70 on 12/31, so your RMD divisor for your 2014 RMD will be 27.4. That will be 3.65% of your 12/31/2013 adjusted balance for the 2014 RMD. For 2015 your divisor reduces to 26.5.

Submitted by Seth Poppel on Wed, 2014-09-24 22:28

Thank you for the prompt and meticulously-detailed answer.  I first met Ed about 20 years ago in his Rockville Center office and his advice, combined with some of his associates and this forum have proven invaluable in providing me with the assistance I have needed to navigate some relatively complicated IRA transactions.I THANK YOU and all who contribute for your time, effort and energy.  Seth

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