ROTH IRA Recharacterization
A friend of mine did a Roth Conversion (from a Traditional IRA) earlier this year. Due to poor market performance, the account is now down more than 20%. Can they recharacterize back to a Traditional IRA so that they don’t have to pay taxes on the underperforming ROTH? If so, how would they do that? In other words, would they “roll” it back in into the original account that it was rolled over from OR do they need to open a new Traditional IRA? Also, assuming they can do this. Can they do another ROTH conversion from the original account to now take advantage of converting from a depleted asset? In other words, after recharacterizing the first can they try again in the hopes of not experiencing such a sizable drop in value? Thanks in advance!
Permalink Submitted by David Mertz on Wed, 2022-10-12 21:35
Recharacterizations of Roth conversions became impermissible beginning in 2018 after the enactment of the Tax Cuts and Jobs Act of 2017. Your friend is stuck with the consequences of the Roth conversion.
Permalink Submitted by Edward Alferoff on Thu, 2022-10-13 13:13
Many thanks for the quick reply. Is a 2nd Roth conversion in the same year allowed? If so, would it make sense to open up a separate account to do this OR would you combined it with the first?
Permalink Submitted by David Mertz on Thu, 2022-10-13 13:44
There is no limit on the number or timing of Roth conversions. For tax purposes all of the individual’s Roth IRAs are treated together as if they are a single account, so there is no tax benefit to making Roth conversions to different accounts. There might be other reasons that one might want to have more than one Roth IRA such as having different investment choices available at different custodians or to be able to have differing beneficiary designations.