Roth IRA contribution, recharacterization, conversion, recharacterization, conversion?

Apr 13, 2009 4 Replies
[I posted this to misc.taxes, but on reflection this is probably the better place.]

I'm having an awfully difficult time trying to understand how the regulations governing Roth IRAs might apply to a situation like the following. Consider the following facts:


  1. In 2007, T contributes 00 to a Roth IRA.


  1. In 2008, before the 2007 filing deadline, T realizes he was ineligible to make a Roth IRA contribution in 2007, so he recharacterizes the contribution as a Traditional IRA contribution. He deducts 00 on his 2007 Form 1040.

  2. Still in 2008, about 90 days later, T converts the Traditional IRA to a Roth IRA and declares income for 2008 equivalent to the value of the IRA on the day of the conversion.


  1. By 2009, but before the 2008 filing deadline, the value in the IRA has fallen sharply, and T has other reasons (to qualify for a credit) to try to reduce taxable income. So he recharacterizes step #3 to undo the conversion.

  2. In late 2009, T reconverts the IRA into a Roth IRA.

Are all these steps valid? If not, where does it go wrong? Is the second conversion, step #5, an allowable conversion but not an allowable way to adjust the addition to income from the conversion? (That is, would the conversion in step #5 succeed but not change the taxable income for the conversion from what it was in step #3?) I'm just not sure of the right way to approach this, since the closest regulations seem to imagine an initial *conversion* rather than an initial *contribution*.



Many thanks for any thoughts.


-P


I think what's creating your later confusion is attending to the details of something that was totally resolved on the 2007 return. That's all blood under the bridge as of 1/1/2008, and you ignore it when looking at the 2008 transactions.

Yes, as long as step 5 is more than 30 days after step 4. See "Reconversions" on page 30 of Pub 590.

-------------- Phil Marti, VITA Volunteer Clarksburg, MD

It may have been incorrectly reported. How much was actually transferred from one account to the other due to the recharacterization? Was the 2007 contribution segregated from other amounts in the overall Roth, or is the gain/loss to be pro-rated over the entire Roth balance?

Sounds right to me.

-Mark Bole

In this case, the account was fortunately a standalone account, segregated entirely from others. (That is, both the traditional IRA and the Roth IRA involved in the contributions and transfers have no other assets.) So the full value of the account was transferred in both the recharacterization and the conversion. That makes things a bit easier.

My understanding is that the full $4000 could be deducted in 2007 because of the recharacterization (assuming T was otherwise qualified to deduct traditional IRA contributions), and the appropriately reported income for 2008 from the conversion was the value of the account when it was converted. Is that right?

Thank you both for the help!

-P

Yes.

-------------- Phil Marti, VITA Volunteer Clarksburg, MD

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