Sequential Roth IRA conversions and recharacterizations

Submitted by Larry Kriesmer on Fri, 2016-05-20 22:13

I am contemplating the following fact pattern:

Initial TIRA has a value of $100K. I convert $1000 in cash into a new RIRA in January 2016 and purchase equity options on an index. In December of 2016, those options will be worth something or potentially worthless. If worthless, I propose to recharacterize that RIRA back into a TIRA. Assets won’t transfer back to the $100K TIRA, but will be re-titled to TIRA. That TRIA will ultimately have nothing in it, as the worthless option will expire and disappear leaving a zero balance, empty TRIA.

In January of the following year (2017), I will convert another $1000 into a new RIRA and repeat the process.

Question(s):

Since I am converting to a new RIRA, does the “later of subsequent tax year or 30 day rule” apply, effectively limiting my conversion in 2017 to February?

Does using the same $1000 amount put me in jeopardy of the restriction of re-conversion limitations? If so, would converting $1050 or $950 suffice?

Ideally, would the conversion to a separate, distinct RIRA allow me the opportunity to convert and recharacterize multiple times within a tax year, so long as they are new accounts funded with cash and the purchases are made into different option contracts?



Submitted by Alan - IRA critic on Sat, 2016-05-21 00:36

  • If your TIRA is much bigger than the sum of your conversions, then you could not be reconverting the same amounts. However, if your conversions use up a large portion of your TIRA balance, then you need to be careful. One way to do that is to recharacterize to a new TIRA account, not back to the original IRA. Then you can convert from the original IRA any time you want because you could not be reconverting the same amounts. You also need to be organized to keep track of each recharacterized conversion so you don’t get confused. Converting slightly different amounts may help you do that so you can refer to your conversion by amount rather than by date. Also, as long as you are not converting the same amounts (assets), you can convert any time you want to. The waiting period only applies to converting the same amounts (assets). The IRS is not really very active in investigating disallowed reconversions. Your IRA custodian would be more likely to get frustrated if there is excessive recharacterization and reconversion activity.
  • Converting to a separate Roth IRA does not matter when it comes to disallowed reconversions, but it does help for determining if you want to recharacterize or not. If a Roth account holds only a single conversion, then there are no earnings calcs to be done by the custodian for a full recharacterization since the Roth holds nothing other than the specific conversion. To help illustrate to the IRS that you did not reconvert a recharacterized amount too soon, you could recharacterize to a new TIRA account as mentioned above.
  • Then you also need a plan to transfer amounts out of these accounts when you no longer need them or you will end up with dozens of accounts you no longer need. It is OK to empty an account and re use it later as most custodians will allow an empty account to sit there for a considerable period. Therefore, combining assets by transfer does not necessarily involve closing an account, just removing the assets from it.

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