IRA to ROTH IRA….help

In 2010 I converted my IRA to a Roth and deferred the taxes evenly to 2011 and 2012. In 2011, I contributed $6,000 to my IRA (I was 50+) and immediately converted that to my Roth with no tax payments necessary on the conversion in 2011.

Earlier in 2012, I again contributed $6,000 to my IRA and immediately converted that to my ROTH. My issue: my company is closing our pension and profit sharing, and I am having both amounts (hypothetically $200,000 and $100,000 respectively) rolled over into my IRA shortly. Whereas in 2011 the balance in my IRA at 12/31/2011 was $0, and whereas I was expecting my IRA balance at 12/31/2012 would also be $0, with the rollover from my company’s accounts, that will no longer be true. With having an IRA balance at 12/31/2012, will I lose the benefits of the $6,000 conversion to ROTH I made earlier this year, or not; and assuming I do, what suggestions do you have?



The new IRA rollover will make your 2012 conversion of 6,000 mostly all taxable in addition to the final portion of the 2010 conversion.

If you do not want the tax bill for the 6,000 conversion, you can recharacterize that conversion back to your TIRA account.



That is the conclusion I came to as well. Thanks so much for your assistance.



One follow up question, if I may: hypothetically the 6,000 I contributed to my IRA and converted to a Roth 6 months ago has now increased in value to 7,000 because I invested the funds in the market. When I recharacterize back to the IRA, is the amount of recharacterization 6,000 or that amount and any gains made on that invested amount (i.e. 7,000)?



There is an earnings calculation done to determine the dollar amount that transfers back to your TIRA if you recharacterize. The custodian usually does the calculation.

If your Roth only held the conversion being recharacterized, the entire 7k balance would go back to the TIRA and that would result in the gain in the Roth becoming eventually taxable when distributed from the TIRA. Since it appears your Roth holds other contributions or conversions, the investment results of the entire Roth must be considered. For example, if your Roth held 18k that did not change in value plus the 6k conversion that increased to 7k, your Roth earnings on the entire account are only about 4%. That would mean that 6,000 plus 4% would transfer back to the TIRA when you recharacterize.

Earnings on your conversion are a factor to consider before recharacterizing. While you are eliminating a tax bill caused by the large rollover, you are also changing some amount that would have been tax free Roth earnings back to the TIRA where they will eventually be taxable upon distribution.

Here is the formula if you want to figure the earnings yourself or check the custodians calculation:
http://www.retirementdictionary.com/definitions/netincomeattributablenia



You are correct that the Roth has amounts from a 2010 conversion of my then entire IRA, as well as a 2011 $6,000 IRA contribution conversion. At what points in time are the earnings calculations determined? Value Roth on date of conversion of $6,000 and then value again on date of recharacterization?



Yes, it’s a % comparison of the “adjusted opening balance” and the “adjusted closing balance”. For the definitions of those terms see the link I posted earlier.

If there were any other contributions, transfers, or distributions between the dates of the conversion and recharacterization, proper adjustments must be made in the calculation for those transactions. You can actually skew the calculation one way or another by making one of those transactions before you recharacterize.



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