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Recharacterization of stock transfer to Roth from Trad IRA during year

In mid 2008, TP elected to rollover 1000 Sh of WAMU from Trad IRA to Roth IRA (both held by same trustee), in expectation decrease in WAMU value would lower taxable distribution.

As it happened, WAMU collapsed within 3 months. So in September 2008, since it had been a transfer of stock shares by the same trustee, TP inquired of broker/trustee if those same shares could be recharacterized

-- and thus negate the original transfer (and consequent taxable distribution).

Trustee agreed since the stock had not been traded/monetized, that such a recharacterization would negate the effect of the original rollover, and since the actual shares of stock were transferred, it would have the desired effect.

Now, 1099R is issued showing the original distribution based on the "theoretical value" of those shares at time of rollover and therefore erasing the effect of the recharacterization -- under the theory that it was the "value of the shares" which was transferred, rather than the _actual shares_, and the "recharacterization" thus became meaningless, since those shares were without value at the time of recharacterization.

Is this correct? Broker's opinion at the time was in agreement with TP

-- that the 1000 Sh of WAMU were the conversion, and thus it was those same 1000 Sh which were recharacterized.

Pub 590 discusses a negative recharacterization in the event a loss has been experienced, but it is not dealing with the same specific shares of a particular stock.

Please provide cite which might persuade the trustee to issue a "corrected 1099R" without the "theoretical value" of those shares included as a distribution, since the same shares were "recharacterized."

Bill

Reply to
Bill
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I assume he never noticed that everything the trustee prints says "Don't rely on us for tax advice."

Yes. There's no theory about it. That's the law.

I'm snipping all the irrelevant Who shot John? about what everyone thought. What's important now in determining how to fix things, if necessary, is what was the history of the Roth. If the Roth was established solely to receive the conversion, there's no problem. If there was other stuff in there, more work is needed in order to wipe out the now phantom income from the conversion.

Please advise.

- Phil Marti Clarksburg, MD

Reply to
Phil Marti

snipped-for-privacy@verizon.net (Phil Marti) posted:

Roth was originally established via conversion when that first became available -- about 10 years ago. No subsequent contributions nor rollovers, until the 1000 Sh of WAMU in 2008. Value at end of 2007 was about $35,000. Value at end of 2008 is about $33,000.

While WAMU shares were "alive" 1 cent/share dividend was issued ($10), and trustee has apparently incorporated that with WAMUQ value at time of recharacterization for a separate 1099R Box 7 Code N, totalling $34 -- presumably based on the $10 + 2.4 cents per share of WAMUQ bid at time of recharacterization (guessing!).

Bill

Reply to
Bill

Which OP has already said wasn't the case. Please, he's confused enough without turning this into a discussion of all the possible tidbits of recharacterization.

Reply to
Phil Marti

It's helpful to know for those of us who want to consider converting an IRA to a Roth in the future.

Reply to
DF2

No, you have to deal with total *conversion* for the given tax year (the "computation period", which is from the date of conversion to the date of recharacterization). The fact that you may have other Roth amounts from prior year contributions or conversions is irrelevant.

The OP is a tax preparer who has been a regular participant in this group longer than me, so I trust he will speak for himself if he is confused.

There is a very good article on this topic, which I first came across by reference in this very newsgroup, at the following link:

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(Bob Keebler and Stephen Bigge, published in the May-June 2007 issue of the CCH Journal of Retirement Planning, "To Convert or Not to Convert: That is the Question.")

In particular, this article explains the anti-cherry picking rules which state that if you convert two securities in the same transaction, you can't chose to only re-characterize one of them, you have to pro-rate -- unless you kept each conversion segregated.

I do not expect you will ever get 1099-R documents that auto-magically give you the result you want -- you will have to include a statement, or a Form 8275 disclosure, with the return. Typically, you will get a

1099-R that shows the original taxable conversion (distribution from Traditional IRA). Then, if you recharacterize in time, you will get another 1099-R with a box 7 code of either N or R, which shows a distribution in box 1 and hopefully, a taxable amount of zero in box 2a. In this second 1099-R, the amount in box 1 will be the amount *transferred* in the recharacterization, which the custodian is supposed to calculate as the total amount converted plus gain or loss since conversion. (As I previously stated, sometimes they still get this wrong, even to the point of not following their own written advice at the time of conversion).

The amount transferred is not the same as the amount recharacterized. You should include a statement or disclosure of some kind indicating the original amount converted, and the amount transferred in the recharacterization, and that no other contributions or distributions were made during the computation period.

In the OP's case, I don't see why the dividends should be treated any differently from any other gain or loss on the converted amount.

Here is an example from TD 9065 of the type of calculation you will need:

"(6) The following examples illustrate the net income calculation under section 408A(d)(6) and this paragraph:

"Example 1. (i) On March 1, 2004, when her Roth IRA is worth $80,000, Taxpayer A makes a $160,000 conversion contribution to the Roth IRA. Subsequently, Taxpayer A discovers that she was ineligible to make a Roth conversion contribution in 2004 and so she requests that the $160,000 be recharacterized to a traditional IRA pursuant to section

408A(d)(6). Pursuant to this request, on March 1, 2005, when the IRA is worth $225,000, the Roth IRA trustee transfers to a traditional IRA the $160,000 plus allocable net income.
Reply to
Mark Bole

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