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Financial Planning / Tax Strategies
|Subject: Re: Trad to Roth Conversions and Recharacterizat||Date: 3/15/2013 10:38 AM|
|Author: TMFPMarti||Number: 118060 of 121219|
>>Let's say you're going to invest in five stocks. You buy them in the traditional IRA then convert into five Roth accounts, one for each stock. Come 10/1/2013 you see that three are winners and two are big losers. You can recharacterize only the losers, thus eliminating the "phantom" income from only those conversions. If everything's in one account you can't isolate just the loss for recharacterization.<<
I have a few questions about how this works, please.
1a. Do each of the stocks have to be bought in the traditional IRA first? (no transferring cash to the various Roth accounts and then buying the stock from within the Roth account?)
Yes, you must buy in the traditional then convert just that holding into its own Roth account.
b. If, after you've moved the stock to the Roth IRA, you sell that stock and replace it with another, are you out of luck if that replacement stock turns out to be a dog? (I'm more of a buy and hold person, but knowing my options is comforting.)
Once you sell the original stock in the Roth there's no longer any "magic undo" property to a recharacterization.
2. Will there be a problem if the Roth IRA you want to recharacterize is held in an institution that is different from where the trad IRA was held? (The original person asking the question wanted to move money directly from a 527 account to the Roth IRA at another institution and was being told by the receiving institution that he had to move it to a Trad IRA at the new institution first. If the answer to my question is yes, doing that 'extra paperwork' step may be very much to his advantage.) I ask as I vaguely recall being told (the only time I tried to recharacterize) that I couldn't because different institutions were involved and so the money (cash, no stock involved) couldn't be 'put back'.
I would have both the traditional and the Roth at the same custodian. There's nothing in tax law that would prohibit doing it at separate custodians, but financial "service" providers tend to impose lots of their own rules, usually stated as "policy." They'll also probably want to charge a boatload of fees if you want to transfer shares.
3. Phil in a later post, said oops, it's already 2013, make that 10/1/2014. So how does the timeline work? When is the earliest / latest in the tax year you can convert a traditional IRA to a Roth?
January 1. Conversions done during calendar year 2013 are taxable on your 2013 return.
And when is the latest you can recharacterize it -- is it specifically Oct 1 of the following year or is it a number of months after conversion or is it based on something else entirely?
It is the extended due date for the return in question. For 2013 that date is 10/15/2014. (Haven't checked a 2014 calendar, but if that date falls on a non-business day the deadline is extended to the next business day.
4. Moving the stock out of your trad IRA and into the Roth as soon as possible after buying it is key to this strategy, yes?
Yes. The amount of income from the conversion is the stock's value at the time of conversion. We want that puppy taking off in the Roth, not the traditional.
Are there any advantages to buying the stocks and making the conversions as early as allowed in the year as opposed to as late as possible in the year? such as more time to see how the investment is going?? (Or vice versa???)
Or should the timing just depend on whenever you think there's a good entry point for the stock you want to buy?
The general rule, taxes aside, is buy when it looks attractive and sell when it no longer meets your criteria for holding it. This specific strategy is a possibility when you spot a speculative stock that you think will pop before 10/15 of the following year. The longer the time between buying and 10/15, the longer you have to see how it's going.
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