ROTH Conversion
Client converted a large IRA to a ROTH IRA, trustee to trustee (UBS) in early February, at the height of the market. Now would like to reverse the transaction. Client is over age 59 1/2 and is still within 60 days of having done the conversion. Could the current ROTH account simply be moved to his taxable brokerage account (no income in the ROTH) and use his own money to establish a new IRA account and put back the full amount he converted, and thus avoid the tax on the conversion? Are there any penalties associated with doing it this way?
Alternatively, can the client say this was a “mistake” and ask UBS to reverse the reporting, since no tax documents have been prepared yet? Thank you for any suggestions.
Permalink Submitted by Alan - IRA critic on Sun, 2020-04-05 16:04
Neither of those will work. A rollover contribution cannot be made from a Roth IRA to a traditional IRA, and a conversion can no longer be recharacterized. UBS cannot and will not process a recharacterization. Therefore, client’s only hope for relief rests on Congress passing additional relief measures. Reinstating recharacterizations of 2019 and 2020 conversions would be consistent with the intent of the CARES Act as it would reduce taxes in a similar manner as eliminating 2020 RMDs. However, this was apparently not considered for inclusion into the CARES Act, but there is at least a small chance that this could be a part of some future legislation. If not, client is out of luck.
Permalink Submitted by Joe Votava on Sun, 2020-04-05 21:20
Thanks for your reply — I was not thinking of rolling the new ROTH back to the traditional IRA, but rather having the client open a new IRA (at a different custodian) and put in the full amount he had originally distributed to the ROTH. Use his own funds for this purpose, and complete it within the 60 day rollover period.Then, UBS could simply move the new ROTH account money to his taxable brokerage account. So not asking them to recharacterize the ROTH conversion, just disburse the ROTH funds. Since the client is over age 59 1/2, there is no early withdrawal penalty (so no five year hold rule) and the new ROTH account will have no untaxed income because it has dropped in value. I realize these two separate steps amount to a recharacterization, but if within the 60 days and client over age 59 1/2, might it not work? And if not, what might be the penalties for doing so? I realize the best would be for Congress to give some relief here like they did for the RMDs. Thanks again.
Permalink Submitted by Joe Votava on Sun, 2020-04-05 23:37
Not to belabor — I agree the reporting will take place as you describe. But the custodian for the new IRA will also report the contibution to the new IRA. So if/when the IRS sends a notice for underpayment, the taxpayer could show the IRS the IRA was replaced within the 60 day window. Wouldn’t that serve to avoid any underpayment and penalties? Or is there some other rule which would prevent this?