Money losing Roth recharacterization

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imoldfella
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Money losing Roth recharacterization

Post by imoldfella » Thu Oct 01, 2015 1:41 pm

So, not a great year for conversion of TIRA to Roth. My understanding is I should recharacterize my (under water) Roths back to traditional IRA by Dec 1, so that I can try again next year. Does that sound right? Any tax filing gotchas I should look out for?

Thanks!

ThisTimeItsDifferent
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Re: Money losing Roth recharacterization

Post by ThisTimeItsDifferent » Thu Oct 01, 2015 1:51 pm

I hope they are in new separate Roth accounts so you don't need to do a pro rata net attributable income NAI calculation.

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Epsilon Delta
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Re: Money losing Roth recharacterization

Post by Epsilon Delta » Thu Oct 01, 2015 7:15 pm

imoldfella wrote:So, not a great year for conversion of TIRA to Roth. My understanding is I should recharacterize my (under water) Roths back to traditional IRA by Dec 1, so that I can try again next year. Does that sound right? Any tax filing gotchas I should look out for?

Thanks!
I don't know why you think Dec 1 matters. There's nothing particularly special about it, nor Dec 31 or Jan 1st. April 15 is a little bit special (If you recharacterize by then you don't need to file an extension) and Oct 15 is quite special (because it's the final deadline for recharacterizations.

In any case if you have other money in a traditional IRA you can convert that into a new Roth account and recharacterize the prior conversion at your leisure.

livesoft
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Re: Money losing Roth recharacterization

Post by livesoft » Thu Oct 01, 2015 7:24 pm

Oct 15 is special in what year for conversions made in what year?
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Alan S.
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Re: Money losing Roth recharacterization

Post by Alan S. » Thu Oct 01, 2015 10:38 pm

livesoft wrote:Oct 15 is special in what year for conversions made in what year?
It is the deadline to recharacterize conversions (or other contributions) done in the prior year. 10/15 is called the "extended due date" and it only applies if the taxpayer either filed the prior year return by 4/15 OR filed a timely extension.

Recharacterizing the conversion in the same year as the conversion has only one very minor advantage. The 1099R and 5498 forms will be issued and available to the IRS in January, so if you forget to include an explanatory statement with your return, the IRS should be able to figure it out from the 1099R and 5498.

If the conversion was for your full TIRA balance, there is the disallowed reconversion waiting period. Doing the recharacterization by year end does nothing for the waiting period because you must wait 30 days to reconvert whether you recharacterize by year end or next year. And if you recharacterize earlier than 12/1, then the waiting period will be longer than 30 days because you cannot reconvert until the following year. You will lose any advantage of using your marginal rate for the conversion if you recharacterize since you cannot reconvert that year. But if you wait until the following year, there is a chance that the investments will recover their value and you would not need to recharacterize enabling you to utilize your marginal rate in the conversion year.

Again, these reconversion timing limits only apply to the same assets you recharacterized, not to other IRA assets that you can convert anytime you wish.

livesoft
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Re: Money losing Roth recharacterization

Post by livesoft » Thu Oct 01, 2015 10:50 pm

Alan S. wrote:Recharacterizing the conversion in the same year as the conversion contribution has only one very minor advantage. The 1099R and 5498 forms will be issued and available to the IRS in January, so if you forget to include an explanatory statement with your return, the IRS should be able to figure it out from the 1099R and 5498.
Is my edit what you meant? I don't think so because 5498 forms are not available until May, right?

I haven't contributed to a traditional IRA in years, yet I converted this year and will recharacterize this year. I will not get a 5498 because I made no contribution to a traditional IRA.

As for the 30-day reconvert story, consider this scenario:

1. I have a Roth IRA created in April by conversion of a tIRA also created in April by transferring shares from an existing tIRA.
2. I open a new traditional IRA in October, transfer some shares to it from an existing traditional IRA, convert the next day to a Roth IRA.
3. The day after, I recharacterize the first Roth IRA.

I don't see any 30-day waiting period because I am not reconverting at all after recharacterizing.

Thanks for any comments as I have not researched this thoroughly and could be completely off-base.
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Alan S.
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Re: Money losing Roth recharacterization

Post by Alan S. » Thu Oct 01, 2015 11:23 pm

Yes, the 5498 is issued in May, but the IRS will not take any action on IRA matters before May, so by the time they look at your return they will have both the 1099R and the 5498. There is always a 5498 issued to report a recharacterized conversion contribution to the TIRA. The 1099R is for the Roth IRA transfer and the 5498 (Box 4) is issued for the TIRA receiving the recharacterized contribution whether a regular contribution or a conversion contribution.

Yes, no timing limits in your example and you can always illustrate this to the IRS by providing them with a statement copy showing that your second conversion was done before you recharacterized. Therefore, there is no way the second conversion is a reconversion.

The IRS is not active in trying to sniff out disallowed reconversions, but it still is wise to structure your timing and accounts such that it will be evident what you did just in case they ask.

livesoft
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Re: Money losing Roth recharacterization

Post by livesoft » Thu Oct 01, 2015 11:35 pm

Thanks much Alan S. You are an unmatched resource to the forum, so a special thanks for hanging out here.
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Topic Author
imoldfella
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Re: Money losing Roth recharacterization

Post by imoldfella » Sat Oct 03, 2015 10:47 am

Thank you Alan S and others.

The money came from one big SEP-IRA, then I converted to 3 new Roth accounts. (3 so that if one went up, and another down, I could keep the winner) Sadly they are all under water, it's been that kind of year. Now I plan to recharacterize them to TIRA accounts. It seems like 12/1 is a good target, because then I can try again the first of the year and give them at least 11 months to hopefully appreciate. I understand I could stretch it with extensions and such, but I'm inclined just to reset them and just start over after the 30 day waiting period.

kitkatnyc
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Re: Money losing Roth recharacterization

Post by kitkatnyc » Sat Oct 03, 2015 11:22 am

hi - newbie investor here, so sorry for the dumb question - but why would it be a bad year for Roth, rather than a regular TIRA?

pshonore
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Re: Money losing Roth recharacterization

Post by pshonore » Sat Oct 03, 2015 11:31 am

kitkatnyc wrote:hi - newbie investor here, so sorry for the dumb question - but why would it be a bad year for Roth, rather than a regular TIRA?
Because if you convert and the asset decreases in value, when you pay taxes the following year, they based on the value at time of conversion. So if I convert $10K of XYZ on July 1, and by Dec 31 it drops 50%, (or even more the following 9 months), I'm still taxed on 10K. Recharacterization allows you undo the transaction.

kitkatnyc
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Re: Money losing Roth recharacterization

Post by kitkatnyc » Sat Oct 03, 2015 11:42 am

pshonore wrote:
kitkatnyc wrote:hi - newbie investor here, so sorry for the dumb question - but why would it be a bad year for Roth, rather than a regular TIRA?
Because if you convert and the asset decreases in value, when you pay taxes the following year, they based on the value at time of conversion. So if I convert $10K of XYZ on July 1, and by Dec 31 it drops 50%, (or even more the following 9 months), I'm still taxed on 10K. Recharacterization allows you undo the transaction.
did not know that (and i've done a ton of reading, but never came across that...) thanks for the explanation! i'm thinking about converting soon so that's really good to know.

so if you recharacterize it as a TIRA - you don't owe any taxes. right?

pshonore
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Re: Money losing Roth recharacterization

Post by pshonore » Mon Oct 05, 2015 10:04 am

Hypothetical question - convert 20K to a Roth on 7/1/15 - value subsequently drops to 10K by year end. If a re-characterization is completed by 12/31/15, Custodian will supply all the paperwork needed (1099R forms) in early 2016 for inclusion on tax return due 4/15/16. What if the re-characterization is done on 3/1/16? Can you still include it on your tax return due 4/15/16, or do you have to wait until the proper paper work is supplied in 2017 (meaning you still have to pay any tax resulting from the conversion with the 4/15/16 return and then get it back in 2017)

Alan S.
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Re: Money losing Roth recharacterization

Post by Alan S. » Mon Oct 05, 2015 1:02 pm

pshonore wrote:Hypothetical question - convert 20K to a Roth on 7/1/15 - value subsequently drops to 10K by year end. If a re-characterization is completed by 12/31/15, Custodian will supply all the paperwork needed (1099R forms) in early 2016 for inclusion on tax return due 4/15/16. What if the re-characterization is done on 3/1/16? Can you still include it on your tax return due 4/15/16, or do you have to wait until the proper paper work is supplied in 2017 (meaning you still have to pay any tax resulting from the conversion with the 4/15/16 return and then get it back in 2017)
If you recharacterize a 2015 conversion (as late as 10/15/2016), you do not include the conversion on your 2015 return. If you already filed 2015 before recharacterizing you must amend your 2015 return.

But the IRS wants an explanatory statement included with the 2015 return no matter when you recharacterize. If the recharacterization is done in the same year the IRS can probably figure it out from the 1099R/5498 to be issued the following year, but they still want the explanatory statement. But the statement is more critical if you recharacterize the following year since it will be two years from the conversion before the 1099R/5498 are issued. Lack of the statement will likely trigger an IRS inquiry in this situation.

Due to the explanatory statement, you report what you know when you file. You do not have to wait for the 1099R/5498. People who wait until the following fall to recharacterize will often file an extension to avoid having to amend the prior year return. In that case the explanatory statement can be completed but the numbers must be picked from the IRA statements.

For more detail, see the Form 8606 Inst, p 3 and 4.

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