Trad IRA conversion – multiple Roth IRAs
client has 1 trad IRA, no nondeductible contribs. client converts 50% of trad IRA into one Roth IRA and 50% of trad IRA into another Roth IRA. 1st Roth IRA does great, second IRA declines significantly in value. can client recharacterize the loser on a timely basis so the conversion income attributable to 2nd Roth IRA is “undone”, while the 1st Roth IRA is left to continue to soar? Or, does client have to split trad IRA into 2 trad IRAs, then convert the 2 trad IRAs into 2 separate Roth IRAs. do you get a different tax answer? i don’t see why some suggest that you must split the trad IRA into 2 trad IRAs before you convert 2 trad IRAs into 2 Roth IRAs. why can’t client just split trad IRA directly into 2 Roth IRAs and still preserve opportunity to recharacterize loser without tax cost?
Permalink Submitted by Alan Spross on Wed, 2010-01-20 22:08
2 TIRA accounts would NOT be needed UNLESS the distributions to the different Roth IRAs were done on the same date. If done on the same date, then partitioning into 2 TIRA account first would eliminate any possibility that the conversion could be deemed one conversion. With 2 TIRA accounts, there will be a separate 1099R required for each distribution.
Recharacterizations are ordered based on a distribution made each specific date. Therefore, only one TIRA is needed if the Roth distributions to be converted are done on different days.
The number of receiving Roth IRA accounts affects the balances used in the earnings calculation. Using separate Roths insures that the results of one conversion will not be commingled with the results of a different conversion or a pre existing Roth balance if a conversion is done into a pre existing Roth. This is critical to various conversion strategies where the best performers are retained and the worst recharacterized.