Failed Roth Conversion

Submitted by M T on Thu, 2016-02-04 21:14

I had a failed Roth Conversion in 2015 that I have recharacterized back to my IRA in 2016. Can I convert that asset in 2016 or do I need to wait until 2017?

Any help is appreciated.



Submitted by Alan - IRA critic on Thu, 2016-02-04 21:56

You must wait until 30 days AFTER the day the recharacterization of the 2015 conversion was processed to reconvert. If the conversion had been done this year, then you would have had to wait the longer of 30 days or until 2017. By “failed conversion” I assume you are referring to a conversion that is fine with the IRS but not with you as opposed to one that involves IRS infractions such as converting an excess contribution or RMD.

Submitted by M T on Thu, 2016-02-04 22:10

Background:  The initial conversion was done in early 2015 and canceled later in 2015, after over 30 days it was reconverted not realizing I had to wait until the New Year.

Submitted by Alan - IRA critic on Thu, 2016-02-04 22:47

Not good. This actually IS a failed conversion – unless you can show that you had enough other assets in your TIRA accounts such that you were able to convert different amounts than your recharacterized conversion. In other words, if this conversion was your entire TIRA balance, then you have a failed conversion. You probably have a 1099R showing a total distribution equal to both conversions, and a 1099R on the Roth showing the recharacterization transfer coded N – is that right?

Submitted by M T on Fri, 2016-02-05 14:37

The initial conversion was partial, when I reconverted later in the year I converted the entire TIRA.  Yes the recharacterization transfer code is N.

Submitted by Alan - IRA critic on Fri, 2016-02-05 16:34

  • You can take the position that the conversion of additional funds for the reconversion was the conversion of different amounts than the recharacterized conversion. However, that still leaves you with a failed conversion for reconverting the balance from the recharacterization in the same year. You have since recharacterized the failed conversion back to the TIRA by the deadline, but may also have recharcterized the portion of the conversion that was not failed.
  • The recent recharacterization of a 2015 failed conversion results in a new waiting period to reconvert. However, since the failed conversion was in 2015, you only need to wait 30 days to legally reconvert again.

Submitted by M T on Mon, 2016-02-08 21:59

OK thank you.  So it sounds like I could have kept the later piece intact this year without canceling it, because it was a good conversion.  Apparently its not which account was converted but rather the specific security and quantity that is subject to the IRS conversion rules, itemizing what was good and what wasn’t would have been the key, correct?

Submitted by Alan - IRA critic on Tue, 2016-02-09 01:31

  • No, the specific security is not a factor. Rather, it is tracing where the recharacterization money went in determining if those same dollars were reconverted or not. Yes, you could have kept the last conversion partly in place to the extent of the excess of the amount that had previously been recharacterized. But not a problem that you recharacterized the whole thing, since the entire conversion may have lost money.
  • To make sure we are on the same page, I assume you had one TIRA and did a partial conversion in 2015 and then recharacterized it (better not to use the term cancelled) it in 2015. Lets say your TIRA held 30k and you converted 18k which lost value and when you recharacterized it only 16k moved to the TIRA. Then also in 2015 you converted the entire value of that IRA which included the 16k. The reconversion of the 16k in the same year was the failed conversion, the the rest of that conversion was OK. Now you again recharacterized that entire conversion in 2016, and you need to wait 30 days after the recharacterization to reconvert any of this money back to the Roth. 

Submitted by M T on Tue, 2016-02-09 14:59

This went a direction I didn’t expect, thank you for your help.  So I get it right this year can you confirm this example is a good conversion.  50k Ira initialy and I convert 10k, it goes to 8k so I recharacterize it.  In the same tax year I convert another 10k of the same secuirty (or not).  Does this work.  And I guess I would just pop in what I actually converted on 15a of my 1040?Thanks again.

Submitted by Alan - IRA critic on Tue, 2016-02-09 17:36

  • Yes, that would work. Since you have 50k to begin with, you still have approx 40k of other funds that were not recharacterized. Therefore you are converting different amounts than the first conversion. Whether you second conversion uses the same security or not is not a factor, it just cannot be traced to the same dollars that you recharacterized. The IRS rarely looks into this rule, but if they were to inquire it helps to recharacterize to a new IRA. That way the money can easily be traced and never goes back into the original TIRA account which funds both conversions. You can combine these accounts later on if you wish. Note that if you do transfers between IRA accounts that are not related to either a conversion or recharacterization, it muddies the waters when it comes to tracing down where recharacterization money ended up.
  • Line 15a can be tricky following recharacterizations. In your example, lets assume you convert, recharacterize and do another conversion ALL in 2016. You will get a 1099R for the total of both conversions and another 1099R from the Roth for the recharacterization transfer to the TIRA (Code N). The total of all these 1099R forms goes on line 15a. Form 8606 will only include the net conversion amount you kept and the 8606 will also determine what amount is taxable and goes on line 15b.
  • But if you recharacterize a 2016 conversion in 2017 (you have until 10/15/2017 to do that), then there will be no 1099R for the recharacterization in Jan, 2017. That 1099R will be issued in Jan, 2018 but coded to apply to a 2016 conversion (Code R). In this case, your 2016 line 15a would only include the two conversions, not the recharacterization since that did not occur in 2016. But the 8606 and line 15b would be the same as in the above example.

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