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Subject:  Trad IRA to Roth: Conversion? Date:  1/12/2004  4:48 PM
Author:  alphab Number:  38487 of 88077


I contributed $3500 to my Vanguard Roth in 2002, but as my AGI exceeded the limit I recharacterized the entire contribution to a newly opened Traditional IRA with Vanguard in 2003. This constituted a 2003 'distribution' from Roth IRA according to Vanguard Portfolio Summary, and was about $3200.

I thought I could recharacterize this conversion in 2004 to a Roth IRA. But, according to Vanguard this was possible only until the end of 2003 and in any case this would nullify the previous conversion, an outcome I would not wish.

Apparently, it will have to be a same trustee 'conversion', but will be treated as a rollover involving a distribution. As an option I may also leave this investment as it is and take the distribution(s) later, or withdraw the entire amount right now as a distribution but not put it back into a Roth account. I would appreciate if someone with expertise in this area could confirm that the above interpretation is correct.

I am not sure of the tax implications of these options. Do I have to pay tax on the gain above $3200 although my original investment was $3500? The difference will be small, but I would like to report it correctly in the 2004 tax return.

Also, in case I rollover to Roth IRA (now or later) can I still contribute in that year to Roth in the usual way- $3000 or $3500 or whatever?

Finally, quite soon I may like to transfer my 401(K) money to Vanguard from my previous employer. I understand I will have to first open a traditional IRA with the money, and then take distributions either for investing in rollover Roth IRA or for other non-IRA use. In either case, I will have to pay tax on the distribution(s) in full. Am I correct in thinking that this rollover conversion to Roth is quite unrelated to the annual Roth contribution rules?

Many thanks in advance.

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