how to recharachterize a roth conversion
My client in 2015 transferred 100k from a rollover IRA (which had a 200k balance) and converted 100k of it to a Roth IRA. The account value went down due and he wishes to recharachterize. What steps must be done? Does it make a difference if he transfers the roth back to the same ira where it came or does it make it easier to go into a new IRA with no previous balance? Thank you.
Ron
Permalink Submitted by Alan - IRA critic on Wed, 2016-09-21 20:42
Did you mean that 100k was converted to a Roth IRA, and the other 100k was transferred to a new TIRA custodian? If so, the recharacterization can be sent to the current TIRA account, or the client can have a TIRA opened at the same custodian that holds the Roth IRA. The latter is preferable if there is any intent to do more conversions soon. This helps to show that he did not reconvert the same funds that he recharacterized before the required waiting period. Client needs to get going on this since the deadline to complete the recharacterization is 10/17. Client will also have to amend the 2015 return if it has been filed, or file on extension by 10/17 to avoid a late filing penalty. Remember, if the loss is minor (eg less than 5%), it is probably not worth recharacterizing unless the taxes will be a hardship. Client could also do a partial recharacterization of any portion of the original conversion, as the first dollars converted may have been in a lower tax bracket.
Permalink Submitted by Ronald Birnbaum on Wed, 2016-09-21 21:33
Yes the 100k was converted to a roth and the other 100k stayed in the TIRA after it was rolled over. I thought there was another form besides an amended tax return to fill out? Maybe an 8606? Thanks.
Permalink Submitted by Alan - IRA critic on Wed, 2016-09-21 22:34
Yes, an 8606 must be completed to report a Roth conversion. If the conversion is subsequently fully recharacterized the 8606 is not needed and would be removed from any 1040 X filed to eliminate the conversion from income.