When Can I Reconvert Recharacterized IRA Funds?

Now that the time to recharacterize a 2010 Roth conversion has passed, the next question many taxpayers are asking is, “When can I reconvert those funds?” 

The tax code says you can reconvert more than 30 days after your reconversion or in the following year - whichever is later. Here is what that means in English. If you converted in 2010 and recharacterized on October 12, 2011, then you must wait 30 days to reconvert - to be safe you can reconvert on November 13, 2011.

If you converted in 2011 and recharacterized in 2011, then you must wait until 2012 (the following year) to reconvert. Essentially, you can only convert the same funds once a year. In no case can you reconvert in less than 30 days. If you convert in 2011 and recharacterize on December 15, 2011, then you must wait 30 days - until January 16, 2012 - to reconvert.

Also keep in mind that any reconversion done in 2011 or 2012 is included in your income for that year. The option to defer the income tax was for 2010 conversions only. Don’t miss the opportunity to convert or reconvert to a Roth IRA at today’s historically low tax rates. Once in the Roth IRA it will grow tax free forever. Moving your money from taxable territory to tax-free territory is never a bad thing!

2014 Retirement Guide Helps You Save and Stretch Wealth

-By IRA Technical Consultant Beverly DeVeny and Jared Trexler

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Roth Recharacterization Deadline Final Word

There is one final word to add on the Roth recharacterization deadline for Roth IRA conversions completed in 2010. The recharacterization deadline for residents residing in certain counties of states impacted by Hurricanes/Tropical Storms Irene and Lee, as well as the Texas wildfires, has been extended to October 31, 2011. Details regarding this relief can be found on the IRS website at the following location:

http://www.irs.gov/newsroom/article/0,,id=108362,00.html

Given the financial importance of the recharacterization topic to many of our readers, we want to summarize for the very last time (this year) the reasons to consider one.

The first reason is the most obvious: Asset value decline.

For example, if you converted to a Roth IRA in 2010 and the market value of the conversion was $100,000 you will pay income tax on any part of that amount that does not consist of after-tax funds. You either opted to pay the tax in full in 2010 or you could spread the conversion amount equally over 2011 and 2012.

Let’s assume that the market value declined and the value of the conversion is now $60,000. By October 17, 2011 you can undo (recharacterize) the conversion, recoup any taxes you've already paid or avoid paying any remaining tax on the $100,000. The recharacterization must be done as a trustee-to-trustee transfer, rather than as a withdrawal from the Roth IRA and a subsequent deposit to a traditional IRA.

The rules regarding the re-conversion of recharacterized funds require you to wait until more than 30 days have passed since the recharacterization, or until January 1 of the year following the year of the original conversion, whichever is later. In this case, the 30-day waiting period would apply.

The second reason for recharacterizing is that you do not enough ready-cash available to pay the income tax due on the conversion. It is always better to pay any conversion-related taxes using funds from outside of a retirement plan.

The third reason is that you have slid into a lower tax bracket, perhaps due to some unexpected business losses, and it makes no sense to pay the conversion tax at a rate higher than the one you currently occupy.

Fourth, perhaps you’re not maximizing the long-term impact of your IRA contribution. While there is no more income limit associated with conversions (so everyone with an eligible account can convert it to a Roth IRA if they so desire), income limits do still exist with respect to your ability to make annual Roth IRA contributions and to deduct traditional IRA contributions. So, if you find that you have contributed more than you can deduct to a traditional IRA, see if you qualify for a Roth IRA and then recharacterize your contribution.

If you want in-depth articles on these reasons and anything else associated with Roth recharacterizations, visit this LINK for a complete list of articles from our Roth Recharacterization Week.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Marvin Rotenberg and Jared Trexler

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Important October Deadlines for IRAs

October is almost here, and with the turning of the page comes some important IRA deadlines you should add to the calendar.

October 15, 2011
This deadline is actually October 17th since the 15th is on a Saturday this year. It is...
• the last day to complete a Roth recharacterization for a 2010 Roth conversion
• the last day to recharacterize a 2010 contribution
• the last day to remove an excess or unwanted 2010 contribution to avoid the 6% penalty for 2010
The deadline has been extended to October 31st for those taxpayers in federally declared disaster areas for Hurricanes Irene and Lee and for the Texas wildfires.

October 31, 2011
This deadline applies to trust beneficiaries of both IRAs and employer plans. It is the last day to provide an IRA custodian or plan administrator with a copy of the trust document or a listing of the beneficiaries and their entitlements. If this deadline is missed, the trust cannot be treated as a see-through trust.

These are deadlines you do NOT want to miss as they all have serious tax implications for IRA account owners and beneficiaries.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By IRA Technical Consultant Beverly DeVeny and Jared Trexler

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Roth Recharacterization Week Summary

Below is the video summary of Roth Recharacterization Week. Thank you for reading and make sure to bookmark these articles for more information up until the October 17th deadline.

2014 Retirement Guide Helps You Save and Stretch Wealth

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Roth Recharacterization Week: Tweets of The Week

Below are some of the best tweets from Twitter about Roth recharacterizations this week.  We hope you appreciated the depth of information covered this week and gained some valuable knowledge on the process.  We will have a video blog up this afternoon to wrap up the week.

Also, if you want more information on Roth recharacterizations, the September issue of Ed Slott's IRA Advisor newsletter is full of information. CLICK HERE to order a year-long subscription.

You can also listen to a 20-minute webcast on Roth recharacterization traps you must avoid.

CLICK HERE to purchase the webcast 5 Roth Recharacterization Cautions.

 
Tweets of the Week:

@CEPLAWYERS: Should You Reverse That Roth Conversion? You have until Oct. 17 to change a Roth conversion back to a traditional IRA. bit.ly/rkKftE

@RETIREMENTPLANR: Should You Reverse a Roth Conversion? - you have until Oct. 17 to change a Roth conversion back to a traditional IRA - dlb.bz/apqNE

@COLBYYOUNVEGA: Personal finance: Undoing a Roth IRA conversion could save money bit.ly/oj4kt6

2014 Retirement Guide Helps You Save and Stretch Wealth

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Recharacterization: What Amount Goes On The Form?

You are going to see a lot of information on the recharacterization deadline for 2010 Roth conversions, which is rapidly approaching, so you should be able to figure out what you need to do to accomplish a recharacterization. (If you do need more information, check out IRS Publication 590 available at www.irs.gov.)

I want to answer the most crucial question for you, the one that confuses many people, and the one that is left out of most articles. When the form says how much do you want to recharacterize, what do you put down?

Do you use the amount the assets are worth now? Do you use the amount that you want to send back to the IRA? Do you use the amount you originally converted? This last one is the correct answer.

If you converted $50,000 and today it is worth $35,000 or today it is worth $90,000, you put down that you want to recharacterize $50,000 on the recharacterization form. Then a net income calculation is completed and gains or losses are attributed to the $50,000. The net amount is then transferred back to a traditional IRA.

For a partial recharacterization, you again put down the amount you want to recharacterize. After the net income calculation and the attribution of gains or losses in the account, a net amount is transferred back to a traditional IRA.

In its Publication 590, IRS suggests that the IRA custodian should do the net income calculation. Many custodians will not. If your custodian is one that will not do the calculation, you can use the formula IRS provides in Publication 590.

It is always a good idea to consult with your financial advisor or tax professional before doing a recharacterization. You need to get it right the first time. You can find an Ed Slott trained advisor on our website. Click on Find an Advisor.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By IRA Technical Consultant Beverly DeVeny and Jared Trexler

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Roth Conversions, Recharacterizations Highlight Mailbag

This week's Slott Report Mailbag answers a Brooklyn, New York man's question about converting to a Roth IRA, but we go a step further (and stay with the theme of Roth Recharacterization Week) and highlight the "un-do" perk if he decides to convert his funds.

1.

I am a 58-year-old civil servant with a defined benefit pension. I plan to work until I'm 67. I've also saved $190,000 in a 457 plan. Should I do a Rot IRA conversion now to avoid uncertain tax rates in nine years?

J. P. Soso
Brooklyn, NY


Answer:
We like Roth IRAs for many reasons, particularly if you feel you will not need that money to live on when you retire. A Roth IRA has no mandatory Required Minimum Distributions (RMDs) when you turn age 70 1/2 and even allows contributions after age 70 1/2 if you have earned income. Any distributions, whether to you or your heirs, will generally be income tax free (there are rules to determine which distributions are tax and penalty free). And you are correct that who knows where income tax rates will be in 9 years. It is very hard to imagine that they will be lower.

The one very nice feature of doing a Roth IRA conversion is you do get a second chance. When you convert to a Roth IRA you have until October 15 of the year following the conversion to undo it, called a recharacterization, and get back any income taxes you paid on the conversion. We have written about this procedure all this week in The Slott Report.

If the value of the converted assets declines in value, you have the ability to undo the conversion no later than October 15 of the year following the conversion. You certainly don't want to pay income tax on a disappearing value.

You should first check with the plan administrator of your defined benefit plan and the 457 plan to determine if you are eligible to take a distribution from either plan. If you do convert to a Roth IRA, it is always better to pay any income tax due with other money rather than taking it out of the IRA money.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Marvin Rotenberg and Jared Trexler

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3 Things You Need to Know About Roth Recharacterizations

1) Recharacterizations of Roth IRA Conversions Always Go Back to a Traditional IRA

Many types of retirement funds can be converted to a Roth IRA. Since the Tax Code technically treats a conversion as a rollover to a Roth IRA, if you can roll the funds to a traditional IRA, you can convert them to a Roth IRA. That means that traditional IRAs, SEP IRAs, SIMPLE IRAs (after 2 years) and, plan permitting, 401(k), 403(b), 457 and other qualified funds can all be converted. But, should you decide that you no longer wish to keep your conversion and want to recharacterize the transaction to get your tax dollars back, regardless of where the money originally came from, the funds will go back to a traditional IRA.

2) A Recharacterization Does Not Have To Be All Or Nothing

This one is pretty self explanatory. If you made a 2010 Roth conversion, but don’t want to keep the whole thing (perhaps you just don’t want to pay all that tax right now), no problem. Under the Code, you can recharacterize all or any portion of your conversion. Keep in mind though, that while this is what’s allowed under the Tax Code, your specific investment could impose further restrictions. For example, you may have an investment strategy that requires a minimum balance, that if split between an IRA and a Roth IRA, would no longer meet that minimum balance per account.

3) There Is The Potential For Relief If You Miss The October 15th Recharacterization Deadline

Roth conversions can generally be recharacterized up until October 15th of the year following the year you convert, whether you are on extension or not. But what happens if you miss the deadline, can IRS provide relief? Thankfully, the answer is yes, but you shouldn’t count on it. If you have a “real” excuse, such as a severe illness, death or natural disaster that legitimately prevented you from recharacterizing your conversion by the October 15th deadline, IRS may very well grant you an extension to do so. On the other hand, if you didn’t know about the deadline, forgot about it or now wish to recharacterize simply because your account dropped in value, IRS is not likely to cut you any slack. Even when IRS does provide relief and grants a PLR, it’s not without significant cost. The “bargain” rate IRS fee for a late Roth recharacterization PLRs is $4,000 (most PLRs are $10,000) - and that doesn’t include professional fees to prepare the ruling which could easily run $5,000 or more.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Jeffrey Levine and Jared Trexler

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Recharacterization Deadline is Approaching

Approaching as quickly as a Caribbean hurricane is October 17, 2011, the day of reckoning for undoing 2010 Roth conversions.  A recharacterization means reversing your Roth IRA conversion as if it never happened.  Once this date passes, most individuals who made 2010 conversions that they did not recharacterize will be irrevocably locked into them as well as their accompanying tax bills.

For individuals who have already lost substantial value on Roth conversions made in 2010 due to poor investment performance, the decision to recharacterize is often a no-brainer. Why pay income tax on market values that no longer exist?

You have until October 17, 2011 to recharacterize a 2010 conversion even if you have already filed your 2010 income tax return. You will have to file an amended return on Form 1040X (and also an amended state tax return, if applicable) to receive a refund of any tax paid on your conversion. The amended tax return must be filed no later than three years from the original due date (or extended due date) of your original return. Any income tax you already paid with IRA or Roth IRA funds cannot be added to the recharacterization amount.

You can do either a full or partial recharacterization. The mechanics are easy when it comes to a full recharacterization of a Roth IRA that holds only converted funds. You simply request a recharacterization of the original amount converted and the entire balance in the converted Roth account to be transferred to your traditional IRA and it’s done. Any gains or losses experienced in the Roth IRA carry over to the traditional IRA.

For a partial recharacterization, a net income calculation must be done on the entire account and the resulting gains and losses are apportioned to the recharacterization amount. The net amount is then transferred, trustee-to-trustee, back to the traditional IRA. You might want to consult with your financial advisor regarding this calculation and the documents required to do a recharacterization.

Assets that have undergone a Roth recharacterization can be re-converted to a Roth IRA, but only after a waiting period has passed. This waiting period is the later of:

a. More than 30 days, or
b. January 1 of the year following the year of the original conversion.

New IRA funds can be converted at anytime.

You need to decide now if you are thinking about a possible Roth recharacterization. You’ll want to provide your IRA custodian with ample time to complete the transaction. There are very few, if any, opportunities in the tax code that allow you a second chance without penalty. And remember, unlike many school-yard games from your childhood, there are no longer “do-overs” when it comes to missing the Roth recharacterization deadline when the only reason for the request is that you changed your mind.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Marvin Rotenberg and Jared Trexler

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Roth IRA Recharacterization Week

It is Roth Recharacterization Week at The Slott Report, and we will bring you information about the important recharacterization decision from many angles and in many formats.  Below is the weekly schedule, and stay connected on Facebook and Twitter for articles on the "financial un-do" from around the web.

Tuesday: Article on the approaching October 17th deadline
Wednesday: Question of the Month dealing with Roth recharacterizations
Thursday: Slott Report Mailbag with questions and answers on the topic
Friday: An article that answers the question, "What amount goes on the form?" (when completing a Roth recharacterization) along with the Tweets of the Week dealing with the topic and a special video blog on the topic

Yes, the deadline isn't until October 17th, but we want to provide the crucial information BEFORE you make your decision.

You can read more in-depth information on Roth recharacterizations in the September issue of Ed Slott's IRA Advisor newsletter. Click here to order.

2014 Retirement Guide Helps You Save and Stretch Wealth

By Jared Trexler
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