Roth IRA correction via roundtrip backdoor (reconversion)

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Roth IRA correction via roundtrip backdoor (reconversion)

Postby stevelion » Thu Dec 27, 2012 1:57 pm

During the 2011 tax filing season (~March 2012), I decided to take some extra cash and open Roth IRAs for my wife and I. Both of us work and have employer sponsored 401k and pension accounts, but neither of us had any IRA accounts. I made a mistake in calculating the contribution amounts and over contributed in both 2011 and 2012 due to income limits. We are married filing jointly and fell within the phase out range in 2011 and will presumably be in the same situation in 2012. I have since corrected the 2011 excess contribution through recharacterization and calculated that I needed to back out 30% for both my wife and I. This has been completed.

For 2012, I'm not sure how much I need to back out because I have not yet calculated my MAGI which is the basis for calculating the income limit phase outs. Unless I misunderstand the tax code, you really can’t calculate your contribution limits until you’ve completed your tax returns for the year. Please correct me if this is not a valid assumption. My thought at the moment is that I could simply recharacterize all of my 2012 Roth IRA contribution as a Traditional IRA contribution in the next couple of days (i.e. in 2012) and then recharacterize it all back to a Roth IRA 30 days later to avoid having to worry about the Roth IRA contribution limits.

My primary question is whether or not this roundtrip conversion from Roth to Traditional and back to Roth through recharacterization is valid and makes sense? Am I missing anything?
Last edited by stevelion on Wed Jan 02, 2013 3:55 pm, edited 1 time in total.
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Re: Roth IRA correction via roundtrip backdoor conversation

Postby stevelion » Wed Jan 02, 2013 2:08 pm

Bump - updated title in hopes of getting some help - anyone?
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Re: Roth IRA correction via roundtrip backdoor conversation

Postby englishgirl » Wed Jan 02, 2013 2:22 pm

You have until April 15th to recharacterize your 2012 contributions.

So, work on your tax return as soon as you can until it is basically complete, but don't file it. Then recharacterize. Then you can change the part in your return about the IRA contributions, and file the tax return. This is where using software such as Turbotax really helps - you can keep stopping and starting and fixing stuff until you are ready to file.

EDIT: Actually, you have until your tax filing deadline, including any extensions, to recharacterize. So it could be later than April 15th.
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Re: Roth IRA correction via roundtrip backdoor (reconversion

Postby stevelion » Wed Jan 02, 2013 3:58 pm

Thanks Sarah. It makes sense, but I'm also concerned about reconversion limits. Can anyone make sense of the IRS rules regarding reconversion in Pub 590? i.e. http://www.irs.gov/publications/p590/ch ... 1000230678

Taken from this publication...

Reconversions

You cannot convert and reconvert an amount during the same tax year or, if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion.

Example.

If you convert an amount from a traditional IRA to a Roth IRA and then transfer that amount back to a traditional IRA in a recharacterization in the same year, you may not reconvert that amount from the traditional IRA to a Roth IRA before:

• The beginning of the year following the year in which the amount was converted to a Roth IRA or, if later,

• The end of the 30-day period beginning on the day on which you transfer the amount from the Roth IRA back to a traditional IRA in a recharacterization.
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Re: Roth IRA correction via roundtrip backdoor (reconversion

Postby Alan S. » Wed Jan 02, 2013 8:10 pm

You are not doing a reconversion because you never did an initial conversion. This is just a recharacterization of a REGULAR IRA contribution from one type of IRA to another. Once that is done, you will do your initial conversion.

It would not become a reconversion until you recharacterized your initial conversion and then wanted to reconvert it. In that case, there are time limits before you can reconvert. In your case there is no time limit to do the initial conversion.
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Re: Roth IRA correction via roundtrip backdoor (reconversion

Postby stevelion » Thu Jan 03, 2013 6:13 pm

Alan S. wrote:You are not doing a reconversion because you never did an initial conversion. This is just a recharacterization of a REGULAR IRA contribution from one type of IRA to another. Once that is done, you will do your initial conversion.

It would not become a reconversion until you recharacterized your initial conversion and then wanted to reconvert it. In that case, there are time limits before you can reconvert. In your case there is no time limit to do the initial conversion.


That makes total sense. Thanks for the input! I think I'm all set.
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