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Greetings, Alpha, and welcome. You wrote:

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.

Okay, you recharacterized your 2003 Roth IRA annual contribution as an annual contribution to a TIRA instead. You're fine so far.

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.

In your case, you did not make a conversion. That's when you rollover money from a TIRA to a Roth IRA. You made an annual contribution to a Roth IRA that you later recharacterized as one made to a TIRA because you exceeded the allowable AGI limits to make a Roth contribution in 2003. Note that although you contributed $3,500, on recharacterization only $3,200 got moved because of a market decline from your original contribution. Because that was a 2003 contribution, the only way you can now get it into a Roth IRA is to convert your TIRA to a Roth in 2004. Assuming you took no tax deduction for the 2003 TIRA contribution, then up to $3,500 of the TIRA you convert to the Roth will be free of income tax. Anything above that amount will be taxed as ordinary income in 2004. See pages 27 and 28 of Publication 590 (Individual Retirement Arrangements) available for download at,,id=97819,00.html

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.

See the procedures for conversion outlined on pages 58 and 59 of IRS Pub 590. If you elect to take and keep money from your TIRA at this point, then you may subject yourself to both income taxes and penalties depending on other TIRAs you may have and on your age. That's not a good approach normally, but there's not enough info in your comment to say definitively one way or the other.

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.

If that's the only TIRA you have and if you elect to cash it in, then no taxes will be due until the proceeds exceed $3,500, the amount of your original contribution. Amounts over $3,500 will be taxed and possibly penalized based on your age.

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?

Yes, you may. Conversion contributions from a TIRA to a Roth IRA do not count towards the allowable annual contribution limits. In 2004 the IRA annual contribution limit is $3,000 ($3,500 for those age 50 or older).

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?

Your understanding is correct on all counts. Just bear in mind that if you do not keep the money in an IRA, then a penalty may also apply in addition to income taxes. That will depend entirely on your age and the reason for which you take the distribution.

Hope that helps.


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