So how many of us are going to undo Roth Conversions now?

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Scorpion
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So how many of us are going to undo Roth Conversions now?

Post by Scorpion »

So like a good Boglehead soldier, I learned all about Roth conversions for folks with income in excess of the normal Roth limits at the end of 2009. I converted significant Traditional IRA balances on the first business day of 2010, and I also did a backdoor 5K contribution for each of my spouse and me. Did the backdoor contributions for 2011 the next year. But now, the issue I feared way back in this post: http://www.bogleheads.org/forum/viewtopic.php?t=65666

has come to pass.

I currently have about $5212.67 in losses in my conversion accounts, or about $1300 in taxes at the 25% bracket. This is lost money if I don't amend my return to undo the conversion. Seems to me that I almost have to go through the hassle of amending my tax return before October 15 and undoing all these conversions with Vanguard, then reconverting after the waiting period has passed.

I have to imagine that almost all of you who converted on 1/4/10 are in the same boat. I chose VTRIX for my conversion, which is especially bad. It would need to gain 13.7% by Oct 15th to get back to even - not likely. So who else is in my shoes, and what are you doing about it?
Wagnerjb
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Post by Wagnerjb »

I converted an IRA to a Roth in September 2010, and it is now worth less than the original conversion amount. However, I converted the 2010 balance because I had a rather unusual opportunity to convert in the 28% tax bracket. Normally, I am in either the 33% or 35% marginal bracket. I believe my loss since conversion is around 10%.

If I recharacterize and re-convert later I will come out behind. For example, let's say I converted $1000 and paid $280 in tax. If I recharacterize and re-convert the $900 balance I will owe either $297 (33% bracket) or $315 (35% bracket).

If I was still in the 28% bracket and expected to remain there for a year or two....I would recharacterize. But as of today that's a loser for me.

Best wishes.
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word
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Post by word »

So, I feel like I'm a bit slow here, but let me see if I get this straight, you want to pull this out because you lost $5200 on the investment and thus the taxes for your contribution would be lower if you had just taken the deduction?

If that's the case it doesn't seem like I care because we don't qualify for the deduction in the Traditional IRA anyway. Perhaps I'm just wholly misunderstanding this though.
Alan S.
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Post by Alan S. »

Looking at your prior thread, it appears that the Roth account you converted to all received two other conversions from non deductible TIRA contributions.

You can still recharacterize ONLY the main conversion if you wish, but the earnings calculation will be based on the entire Roth for the period that your conversion is held. If we assume you have a 15% loss after the custodian does the calculation, then 15% less than the amount converted will go back to the TIRA. The taxable amount of that particular conversion will be reversed, but perhaps the taxable portion was a small % of the total conversion. Check your 8606 to see what the taxable portion was.

You must complete the recharacterization by 10/17 but should probably make your decision by the end of Sept because custodians will have to complete plenty of these recharacterizations. But you can amend your 2010 return later, but should try to get that done no later than Jan, 2012 so the IRS will not be looking for 50% of the taxable income shown on your 2010 return.

There is no sense recharacterizing your 2011 conversion because it was 100% tax free so recharacterizing will not save any tax dollars there.
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grabiner
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Post by grabiner »

word wrote:So, I feel like I'm a bit slow here, but let me see if I get this straight, you want to pull this out because you lost $5200 on the investment and thus the taxes for your contribution would be lower if you had just taken the deduction?

If that's the case it doesn't seem like I care because we don't qualify for the deduction in the Traditional IRA anyway. Perhaps I'm just wholly misunderstanding this though.
It's not a matter of pulling the money out, but of redoing the conversion of a lower price. It won't work for a non-deductible IRA, but if you have a deductible IRA (such as a rollover from an old 401(k)), you can do it.

Example: You converted a $10,000 IRA to a Roth in January 2008, expecting to pay $2500 tax on the $10,000. In November 2008, with the IRA worth $6000, you undid the conversion and made it a Traditional IRA. In January 2009, with the IRA worth $7000, you converted it again, now expecting to pay $1750 tax on the conversion.
Wiki David Grabiner
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RustyShackleford
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Post by RustyShackleford »

Well, if you were heads-up like me (sorry to brag), you made TWO 2010 Roth conversions, of low-correlation assets to separate and empty/new Roth accounts. For me, one was individual Treasury TIPS, and the other was VNQ and RWX (real-estate ETFs). Each conversion was about the amount I want as my net Roth conversion for 2010.

I filed a "request for extension" in April (of my 2010 tax return). This October, before filing my return, I will recharacterize one of these two conversions in its entirety. As of last week, I figured it'd be the TIPS I recharacterized. Time will tell ...
word
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Post by word »

grabiner wrote: Example: You converted a $10,000 IRA to a Roth in January 2008, expecting to pay $2500 tax on the $10,000. In November 2008, with the IRA worth $6000, you undid the conversion and made it a Traditional IRA. In January 2009, with the IRA worth $7000, you converted it again, now expecting to pay $1750 tax on the conversion.
Thanks, that helped a lot.
amarone
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Post by amarone »

My Roth Conversion is all in bonds and is up slightly, so no issue here.
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Scorpion
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Post by Scorpion »

Sorry to revive this old thread, but I wanted to give an update for those in my position. As a general matter, I would recommend what others have recommended in the past - a careful reading of Form 8606, its instructions and Pub. 590. After spending hours creating a spreadsheet, my calcs show that it will be worth it to recharacterize as long as VTRIX stays below $30.85 per share until I can reconvert (in my case, because I am dealing with 2010 conversions, that's 30 days from the time of recharacterization). That's an interesting element here - since I have already locked in my tax if I don't recharacterize, the only thing that matters is what the value is when I convert again, which I of course cannot predict. A value even less than current amounts of course makes it even more attractive to recharacterize.

Interestingly, my wife had a lot more tax deductible amounts in her IRA than I did when we converted. I split hers between one Roth with VTRIX and one with VBR. The VBR one does not have losses, so I won't recharacterize that one; I'll only do the VTRIX one. If I had to do both, it wouldn't be worth it.

If anyone has thoughts or comments, let me know. Thanks to all for your help.
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grabiner
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Post by grabiner »

Scorpion wrote:Sorry to revive this old thread, but I wanted to give an update for those in my position. As a general matter, I would recommend what others have recommended in the past - a careful reading of Form 8606, its instructions and Pub. 590. After spending hours creating a spreadsheet, my calcs show that it will be worth it to recharacterize as long as VTRIX stays below $30.85 per share until I can reconvert (in my case, because I am dealing with 2010 conversions, that's 30 days from the time of recharacterization).
I would suggest waiting until January 2012 to reconvert; you'll postpone the tax for an extra year, and the expected stock market returns for three months are less than the time value of waiting an extra year to pay your taxes.

That's what I did on a 2008 conversion. I recharacterized the conversion in September 2009, and rather than reconverting in October 2009 and paying tax in April 2010, I waited to convert until January 2010 (and, with the special 2010 rules, won't pay tax until April 2012 and April 2013).
Wiki David Grabiner
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