timing of new conversion to Roth if recharacterizing previous year conversion

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Just an Okie
Posts: 1
Joined: Sat Dec 09, 2017 5:13 pm

timing of new conversion to Roth if recharacterizing previous year conversion

Post by Just an Okie » Sat Dec 09, 2017 5:25 pm

The following is my first post, although I have benefitted greatly from the collective wisdom of the Bogleheads for many years.

Suppose I converted part of a Rollover IRA (tIRA) to a new Roth IRA during the summer of 2017, and at the time I made sure to convert enough to push me into the 25% bracket. Suppose that in March 2018 when I complete my taxes that I want to do a partial recharacterization so that my taxable income equals the top of the 15% bracket. I assume the recharacterized funds must be returned to the IRA from whence they came.

1) If I only have one tIRA account, does the IRS 30 day waiting period mean I cannot make a 2018 conversion from that tIRA to a (new) Roth IRA until 30 days after the point in March when I do the partial recharacterization?

2) What happens if I make a conversion in January 2018 before I perform the recharacterization in March?

3) If Vanguard can split my Rollover IRA into two accounts (unsure), would I be able to make a conversion in January from the new tIRA, assuming the funds from the recharacterization in March are returned to the original tIRA?

If recharacterizations are eliminated starting with the 2018 tax year, I assume I still will be able to do a partial recharacterization of a 2017 conversion in March 2018 since this is a 2017 tax filing. And ... If recharacterizations are eliminated starting with the 2018 tax year, life will become simpler, but more expensive.

Chip
Posts: 1777
Joined: Wed Feb 21, 2007 4:57 am

Re: timing of new conversion to Roth if recharacterizing previous year conversion

Post by Chip » Sun Dec 10, 2017 7:19 am

Welcome! Glad you "de-lurked".
Just an Okie wrote:
Sat Dec 09, 2017 5:25 pm
Suppose I converted part of a Rollover IRA (tIRA) to a new Roth IRA during the summer of 2017, and at the time I made sure to convert enough to push me into the 25% bracket. Suppose that in March 2018 when I complete my taxes that I want to do a partial recharacterization so that my taxable income equals the top of the 15% bracket. I assume the recharacterized funds must be returned to the IRA from whence they came.

1) If I only have one tIRA account, does the IRS 30 day waiting period mean I cannot make a 2018 conversion from that tIRA to a (new) Roth IRA until 30 days after the point in March when I do the partial recharacterization?
Yes.
2) What happens if I make a conversion in January 2018 before I perform the recharacterization in March?
The conversion in January does not affect the recharacterization in March. But any conversions AFTER the recharacterization are still subject to the 30 day waiting period.

In my opinion this is the way to do it. I have done it this way in the past and will do it exactly that way in 2018.
3) If Vanguard can split my Rollover IRA into two accounts (unsure), would I be able to make a conversion in January from the new tIRA, assuming the funds from the recharacterization in March are returned to the original tIRA?
Yes, as far as I know. But if you do #2 this won't be necessary.

pshonore
Posts: 5924
Joined: Sun Jun 28, 2009 2:21 pm

Re: timing of new conversion to Roth if recharacterizing previous year conversion

Post by pshonore » Sun Dec 10, 2017 7:42 am

My understanding is the waiting period applies if you convert the same funds after recharacterizing a Roth conversion. Therefore if you convert and recharacterize less than 1/2 of your original IRA balance(s), the waiting period does not apply. For these purposes the IRS looks at all your TIRAs as one so splitting into different account does not change things

Chip
Posts: 1777
Joined: Wed Feb 21, 2007 4:57 am

Re: timing of new conversion to Roth if recharacterizing previous year conversion

Post by Chip » Sun Dec 10, 2017 9:55 am

pshonore wrote:
Sun Dec 10, 2017 7:42 am
My understanding is the waiting period applies if you convert the same funds after recharacterizing a Roth conversion. Therefore if you convert and recharacterize less than 1/2 of your original IRA balance(s), the waiting period does not apply. For these purposes the IRS looks at all your TIRAs as one so splitting into different account does not change things
I think the idea of recharacterizing to a new tIRA was floated here because of concerns that the tIRA custodian might interpret the IRS rules to mean that nothing from the IRA account that received the recharacterization could be converted until the next tax year/30 day requirement. Regardless of the size of the conversion vs. the size of the tIRA.

I have no idea whether or not this actually happens. Perhaps someone with experience will chime in.

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