Conversions and Recharacterizations
Earlier this year when things were going well I converted part of an IRA Account I had with Fidelity to a Roth Account with Fidelity. I then converted part of an IRA Account I had with TD Ameritrade to a Roth Account with TD Ameritrade. I have significant loses in both accounts. Yesterday I recharacterized the Fidelity Account. I have not recharacterized the TD Ameritrade account since I was considering possibly converting another part of the current TD Ameritrade Account to the same Roth Account with TD Am…, and then recharacterizing the original conversion, however I now realize that it might be clearer if I establish a Roth IRA in my wife’s Fidelity Account and convert some of her existing Fidelity IRA Account into the new Roth Account.
The other question I have is why does the recharacterization form ask for the amount of loss in the account since it varies each day and I could not know what the exact loss will be on the date they execute the recharacterization.
I appreciate any help anyone can give.
Permalink Submitted by Alan Spross on Thu, 2008-10-30 22:04
With respect to the TD Amer account, if you intend to do more conversions this year as well as recharacterizing, you need to be sure that the second one is not a disallowed reconversion. The best way to do that is to complete the second conversion prior to recharacterizing, and put the second conversion into a new Roth account. Also, make it for a different amount from the first conversion or even the Fidelity conversion. If you do not do the second TD conversion prior to recharacterizing, at least recharacterize to a new TIRA account rather than back to the original account. Using either of these methods, it should be clear to the IRS that you did not do a disallowed reconversion in the same year.
When spouses both have TIRA accounts, it there are no particular estate related circumstances, it is best to convert funds from the spouse who has the highest percentage of basis in their TIRA, per Form 8606. If neither spouse has basis (ie no past non deductible contributions), it does not matter who converts, but as you indicated, this is another way to be sure there is no reconversion.
You are correct about the amount of gain or loss being an ever changing amount. Perhaps the firms just use the indication to cross check their own figures, or in some cases they will not compute earnings and request the account holder to supply their own figure.
Permalink Submitted by Clyde Wolf on Fri, 2008-10-31 00:34
Jrlow,
Things were going well earlier this year? ;>)
I believe Alan-oniras is correct about Vanguard. They will set up different accounts for hte conversion and for the recharacterization. This leaves a cleaner paper trail for the activities.
If you still want to do a 2008 conversion of additional shares, or about the same number of hares with less tax, you may be able to do a second conversion of a slightly different amount/number of shares, into a new ROTH IRA. Then recharacterize your first conversion. You would only be taxed on the second conversion.
Doing a recharactrization in this fashion will help simply your tax returnfor 2008.
Permalink Submitted by Ted Backmann on Wed, 2008-11-05 17:54
Does a roth conversion have to be done by Dec of the tax year or the filing of the return by 4/15?
Permalink Submitted by Clyde Wolf on Wed, 2008-11-05 18:31
Tedbackmann,
Conversions need to be completed by the end of the tax year. To be on your 2008 tax return the conversion must be completed before January 1, 2009.
Permalink Submitted by Alan Spross on Wed, 2008-11-05 22:04
Actually, the conversion does not have to be completed before January 1, it just needs to be started. In other words, the distribution from the TIRA must be done by year end. If done by rollover, the funds must be deposited into a Roth IRA within 60 days from date of withdrawal from the TIRA.
If this rollover is completed in late February, it is still considered a prior year conversion because that is when the distribution was made. Since it is considered a prior year conversion, the start of the 5 year holding period for that conversion reverts all the way back to 1/1 of the preceding year.
Let’s say it’s the last week in December and you still do not know if you want to convert for the current year. You can either:
1) Actually complete the conversion by transfer or rollover, and then recharacterize it later if you change your mind or are not eligible.
OR
2) Just take a distribution and hold the money in your checking account for a few days until you decide. This keeps your options open, but if you decide not to convert, you can roll the funds back to the TIRA within 60 days.
CAUTION: You must not have used up your one rollover per IRA account to roll the funds back. If you find out you are not eligible to roll the funds back, then you MUST do the conversion to keep the funds in an IRA at all. If you don’t want the conversion, you can still recharacterize it.