Recharacterizing 2017 conversion in 2018

[Alan S.]

Kaye Thomas at Fairmark has confirmed that the IRS will allow these recharacterizations of 2017 conversions.

Still possible to undo 2017 Roth conversions
Posted by: Kaye Thomas, January 3, 2018 11:13AM
I've confirmed that the IRS will take the position that taxpayers can use the recharacterization provisions to undo Roth conversions occurring in 2017 until October 15, 2018. There is no immediate plan to provide official guidance, but possibly this will appear in Pub 590. Anyway, this is what they're telling anyone who asks.

This does not mean that certain custodians won't initially balk at these requests, but the news should eventually be disseminated. Vanguard has also stated they will process the recharacterizations, and probably received confirmation through similar channels.

[cherijoh]

Kaye Thomas at Fairmark has confirmed that the IRS will allow these recharacterizations of 2017 conversions.

Still possible to undo 2017 Roth conversions
Posted by: Kaye Thomas, January 3, 2018 11:13AM
I've confirmed that the IRS will take the position that taxpayers can use the recharacterization provisions to undo Roth conversions occurring in 2017 until October 15, 2018. There is no immediate plan to provide official guidance, but possibly this will appear in Pub 590. Anyway, this is what they're telling anyone who asks.

This does not mean that certain custodians won't initially balk at these requests, but the news should eventually be disseminated. Vanguard has also stated they will process the recharacterizations, and probably received confirmation through similar channels.

Thanks for posting this info Alan!

[2015]

Via telephone on 12/28/17, I recharacterized a January 2017 roth conversion giving specific instructions that this was a recharacterization, as if the original conversion never happened. The January conversion was made into an empty roth account. The VG rep confirmed with me that the entire amount would be recharacterized. While VG recharacterized the original conversion plus earnings, yesterday I received a check for the dividend.

Today, when calling the VG recharacterization department, the rep told me earnings and dividends are treated differently in a recharacterization, which I've never heard of nor can find any reference to, even on Fairmark. After checking, the rep confirmed the account was set up to reinvest dividends so at a minimum VG made a mistake in mailing a check for something that should have been reinvested. The rep then said I could mail back the check at which time I said I had no intention of mailing it back, that VG should void it and recharacterize the amount as it was their fault because I had specifically told the rep last Friday that everything in the roth was to be converted back to the original Tira. I eventually had to hang up on the guy because I was sure he didn't know what he was talking about and knowing I'll probably get someone more knowledgeable tomorrow when I call again. My greatest concern is this will mess up my 1099-r regarding this recharacterization.

Has anyone heard of recharacterizations treating earnings and dividends differently?

[FIREchief]

Via telephone on 12/28/17, I recharacterized a January 2017 roth conversion giving specific instructions that this was a recharacterization, as if the original conversion never happened. The January conversion was made into an empty roth account. The VG rep confirmed with me that the entire amount would be recharacterized. While VG recharacterized the original conversion plus earnings, yesterday I received a check for the dividend.

Today, when calling the VG recharacterization department, the rep told me earnings and dividends are treated differently in a recharacterization, which I've never heard of nor can find any reference to, even on Fairmark. After checking, the rep confirmed the account was set up to reinvest dividends so at a minimum VG made a mistake in mailing a check for something that should have been reinvested. The rep then said I could mail back the check at which time I said I had no intention of mailing it back, that VG should void it and recharacterize the amount as it was their fault because I had specifically told the rep last Friday that everything in the roth was to be converted back to the original Tira. I eventually had to hang up on the guy because I was sure he didn't know what he was talking about and knowing I'll probably get someone more knowledgeable tomorrow when I call again. My greatest concern is this will mess up my 1099-r regarding this recharacterization.

Has anyone heard of recharacterizations treating earnings and dividends differently?

Again VG???

This sounds nuts 2015. Good for you to hold their feet to the fire.

[2015]

That's not the half of it. For brevity, I left out the almost comical parts. Like the rep going away for almost ten minutes during which time I'm sure he was reading IRS recharacterization regs for the first time. He comes back and proceeds to quote from the regs (which mentioned nothing regarding earnings/dividends receiving different treatment)! After a couple minutes I had to stop him, telling him I knew the regs. What does he do? Tells me I could "choose to believe" what I wanted. After another ten minutes of placing me on hold to visit the "Retail Resolutions Group" (what???), he comes back confirms I had elected to have dividends reinvested, but then proceeds to tell me how earnings are different from dividends for the second time. I had the weird feeling it was almost as if he wanted to argue this with me. His next move was to tell me I could mail back the check. Now we all know if I mailed the check back, VG would do nothing until receipt, providing insufficient time to correct the 1099-R's which will be released in the next couple of weeks. Would a knowledgeable individual even make such a suggestion?

I have decided there are two kind of customer service reps: the kind that immediately give you that warm fuzzy feeling of knowing you're being taken care of, but most importantly, that somebody gets you. I encountered these types when calling CoveredCA, my new insurer Healthnet's customer service dept., and the genius Taxact rep who had been a former accountant and who solved my issue by duplicating my return on his end without even seeing mine! Then there's the type that make you feel as if the ground beneath you has suddenly turned to quicksand and you're being sucked down into some kind of black hole. These people have no active listening skills, and are exemplified by the gentleman I spoke with yesterday, and I actually felt sorry for him because I knew this skill lacking could endanger his job eventually.

My strategy is to call VG today and pretend as if this is the first time I'm calling in about the issue. It's the only way to keep my sanity.

[Alan S.]

When Vanguard starts to determine how to correct their mistake, the cleaner method would be to reconstruct the processing to make the full recharacterization reportable on the 2017 1099R to be issued this month even if that means a couple weeks delay on the 1099R. You don't want them to do an additional recharacterization of the distribution check now and then report that next year because it occurred in 2018. You would then have to report a partial recharacterization in 2017 and a small one in 2018. You should resist any suggestion of that.

However, now that you know that this conversion can be recharacterized up to 10/15, this could be an opportunity to have them void the recharacterization entirely and transfer everything back to the Roth. That gives you another 9 months to consider if you still want to recharacterize.

Of course, you did not indicate your total situation but some people rushed out a recharacterization request last week just to play it safe, but would rather have waited and perhaps see the gains on the conversion continue to grow in 2018 before deciding whether (or how much) to recharacterize.

But if you hold their feet to the fire and get the recharacterization correctly completed, you could reconvert after 30 days using the lower tax rates of 2018.

[2015]

When Vanguard starts to determine how to correct their mistake, the cleaner method would be to reconstruct the processing to make the full recharacterization reportable on the 2017 1099R to be issued this month even if that means a couple weeks delay on the 1099R. You don't want them to do an additional recharacterization of the distribution check now and then report that next year because it occurred in 2018. You would then have to report a partial recharacterization in 2017 and a small one in 2018. You should resist any suggestion of that.

However, now that you know that this conversion can be recharacterized up to 10/15, this could be an opportunity to have them void the recharacterization entirely and transfer everything back to the Roth. That gives you another 9 months to consider if you still want to recharacterize.

Of course, you did not indicate your total situation but some people rushed out a recharacterization request last week just to play it safe, but would rather have waited and perhaps see the gains on the conversion continue to grow in 2018 before deciding whether (or how much) to recharacterize.

But if you hold their feet to the fire and get the recharacterization correctly completed, you could reconvert after 30 days using the lower tax rates of 2018.

Thank you for this heads up, Alan. In stark contrast to yesterday, I spoke to an extremely knowledgeable VG rep today and he got everything I said within the first minute of the call. After a brief hold with the Resolutions Team, he informed me he didn't know why the dividend check had been incorrectly sent out, to void the check, that the dividend would be back-dated and recharacterized back to the original recharacterization date (12/28/17), and that I would be getting an account secure email within 5 days letting me know when everything was completed. He did verify VG would be sending out 1099's within the next two weeks, that information for 1099's is pulled at year-end, but wasn't sure if my situation would require a corrected 1099-R or not, as he didn't know the status of the current 1099 processing. Either way, he assured me I would receive the correct 1099-R.

He did confirm with me it was Vanguard's understanding and official position that reharacterizations could be transacted through 10/15/18 for 2017 conversions.