Failed Roth Conversion Options

Submitted by Troy Messier on Mon, 2016-02-15 12:34

I converted from a traditional IRA into a separate Roth IRA account in 2015. The entire account was re-characterized back to a separate traditional IRA account a few months later in 2015. Then, again in 2015 after waiting for more than a month, the entire account was reconverted back to the Roth. I have now found out that the last transaction could only have been done in 2016 and may be considered a failed conversion. Can I again re-characterize the Roth back to a IRA to negate the failed conversion? At this stage, what are my best options to minimize penalty? I am over 60 years old.



Submitted by Alan - IRA critic on Mon, 2016-02-15 17:02

Yes, you can and should recharacterize a failed conversion, but the deadline to complete the recharacterization is 10/15/2016. If you don’t recharacterize it, then the failed conversion would be treated as an excess regular Roth IRA contribution rather than a conversion.  After recharacterization, you must wait 30 days before reconverting but you can reconvert in 2016 because the original conversion was in 2015.

Submitted by Troy Messier on Mon, 2016-02-15 18:25

Thank you.Will doing as suggested avoid penalties altogether? Any special IRS reporting requirements, other than form 8606?

Submitted by Troy Messier on Tue, 2016-02-16 14:25

The original Roth and failed Roth was created in 2015.  If it is recharacterized in 2016 and then reconverted to a Roth (before April 15 2016), is the IRA withdrawal income for the 2015 tax year or the 2016 tax year?

Submitted by Alan - IRA critic on Mon, 2016-02-15 19:59

  • There are no penalties or taxes. Your only potential loss would be in the form of a lost profitable conversion or loss of use of a lower tax bracket in 2015 so your conversion would cost you less. If you have not yet filed for 2015, you would not need an 8606 if you are left with no Roth conversions for the year. But you should include an explanatory statement with your return regarding both recharacterizations, since the IRS will not know that you recharacterized the failed conversion until Jan, 2017 if you do not explain in a statement.
  • It is possible that you do not even have a failed conversion in the first place.  What % of your TIRA value did you convert?  If less than 50% you probably do not have a failed conversion because your second conversion could have been done from different assets than what you recharacterized. If between 50% and 100% you probably have a partially failed conversion.

Submitted by Alan - IRA critic on Tue, 2016-02-16 16:16

Reconversion income is taxable in the year of the conversion – 2016. You can recharacterize a 2015 failed or allowed conversion up to 10/15/2016 and reconvert any time during the year that is at least 30 days after the recharacterization. You are not limited by the 4/15 date.

Submitted by Troy Messier on Tue, 2016-02-16 17:43

Thanks, Alan_iracritic, for your very helpful knowledge and insights.

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