Question on Multi-Bucket IRA Conversion Strategy

Submitted by Ray Kaufman on Wed, 2017-11-01 12:39

I plan to annually do Roth conversions with multiple conversions by asset class. I understand that it is best to create separate accounts by for each conversion by mutual fund to assist with any recharacterizations.

Should I setup multiple accounts on both the IRA and Roth IRA sides? Or is it just the Roth IRA side that should have the multiple accounts?

Thanks,
Ray



Submitted by Alan - IRA critic on Wed, 2017-11-01 16:32

  • Definitely set up separate Roth IRAs to receive each conversion so your recharacterization strategy will be pure and not commingled with other conversions. Setting up separate TIRAs to receive each recharacterization contribution is more optional, as the reason for doing that is for tracing purposes so the IRS cannot maintain that you reconverted the “same amounts” as you recharacterized before the reconversion time limit (30 days or next calendar year). Since your conversions would all come from your larger TIRA account, the IRS could see that you converted different amounts since the recharacterized assets remain in the separate TIRA that received them. There is more benefit for doing this if you are converting a large portion of your TIRA every year. If you have a large balance that you do not convert, then obviously you are not reconverting amounts you recently recharacterized.
  • The trickier part of this is how to remain organized and when to do the non reportable transfers between these account (not the recharacterizations) to re consolidate the balances. The conversions you retain can eventually be transferred into a single Roth IRA, once the recharacterization deadline passes. And the recharacterization TIRA balances can eventually be transferred back into the main TIRA to use for future conversions.
  • You probably do not want to make this too elaborate. For example, by “multiple” conversions” you should probably hold to 3 at the most. You might include a stable value conversion to assure that if the 2 others tank, you still have a conversion to keep that is not a loser so that you will use up your conversion bracket space each year.

Submitted by Ray Kaufman on Wed, 2017-11-01 21:46

I’m looking at doing the following annually for 10+ years and hoping to keep it as simple as possible. January each year – Convert 4 mutual funds from a single TIRA to 4 separate Roth IRA accountsNovember same year – Final decision time. Keep winner(s) and recharacterize loser(s)Repeat process the next year which meets both the 30 day wait and next calendar year.Not sure if I can move winner(s) to consolidated Roth in November or not. I know I can wait much longer into the following year to recharacterize but want to keep it simpler 

Submitted by Alan - IRA critic on Wed, 2017-11-01 23:21

  • There is no waiting period to reconvert if you clearly are converting different amounts (assets). Using the separate accounts helps illustrate that you are not converting the same amounts and that should be very clear to the IRS, which by the way is not actively looking to sniff out disallowed reconversions. 
  • Item deleted as referenced later.
  • You intend to retain the best performing conversion, so once you are sure of the one you will retain, you can transfer it into the consolidated Roth right away. It is the ones that you recharacterize that should be kept in their separate TIRA accounts until the end of the following year instead of transferring those balances into the consolidated TIRA that will fund all the conversions.

Submitted by [email protected] on Thu, 2017-11-02 16:59

Alan, looks like your 2nd bullet may be incorrect.  The original conversion is happening in Jan.  He intends to recharacterize in Nov.  Nothing more in the same calendar year.  Converting anew in Jan the following year.  I don’t actually see any “reconversions” happening with the “same money”.

Submitted by Alan - IRA critic on Thu, 2017-11-02 17:12

Yes, good catch. I edited to delete that text. 

Submitted by Alan - IRA critic on Fri, 2017-11-03 17:00

Beware of Sec 1501 of the House Tax bill. This is the summary from the ASPPA:

IRA Contribution/Conversion Recharacterization Rule  Individuals are currently allowed to recharacterize either contributions or conversions to a traditional IRA into a Roth IRA and vice versa [IRC § 408A(d)(6)].  However, Section 1501 would repeal that provision in the tax code (raising $500 million in revenue over 10 years). 

Submitted by Ray Kaufman on Fri, 2017-11-03 21:40

Okay, maybe a recharacterization strategy won’t be needed. See the same mention in the Slott Report. Ray

Add new comment

Log in or register to post comments