Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev Thread | Next Thread
Author: jpbuening Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Roth IRA for Year 2000 Date: 2/20/2000 9:18 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I just read the fool.com roth ira part vi
learning that for tax year 2000 one can no longer recharaterize one's roth ira and reconvert back to the roth ira within the same year.

I converted shares from trad ira to roth in Jan-00.
Then in Feb-00 I recharaterized them back to the
trad ira and converted them back to the roth ira
due to the recent stock pull backs.
Having just learned about this new rule, this sounds
like a failed converison.

My question:
Can I still leave the shares in the roth ira at the
Jan-00 price and ignore the Feb-00 recharaterization
and converison back to the roth ira?
Or will the shares now be stuck in the trad ira until
the one year waiting period is up in Jan-01?

Thanks.
Print the post Back To Top
Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29358 of 121219
Subject: Re: Roth IRA for Year 2000 Date: 2/20/2000 3:45 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<< I converted shares from trad ira to roth in Jan-00. Then in Feb-00 I recharaterized them back to the trad ira and converted them back to the roth ira due to the recent stock pull backs. Having just learned about this new rule, this sounds like a failed converison.

My question: Can I still leave the shares in the roth ira at the Jan-00 price and ignore the Feb-00 recharaterization and converison back to the roth ira? Or will the shares now be stuck in the trad ira until the one year waiting period is up in Jan-01? >>

It looks to me like the 2/2000 recharacterization was ok, but the reconversion failed. Thus, you're stuck in the traditional IRA until 1/2001. What I'm not sure of is how you handle this with the custodian, to whom it looks like you're currently in a Roth.

Phil Marti
Tax Preparer

Print the post Back To Top
Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29372 of 121219
Subject: Re: Roth IRA for Year 2000 Date: 2/20/2000 6:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
pmarti writes:

It looks to me like the 2/2000 recharacterization was ok, but the reconversion failed. Thus, you're stuck in the traditional IRA until 1/2001. What I'm not sure of is how you handle this with the custodian, to whom it looks like you're currently in a Roth.

I reply:

If I understood Roy's article correctly, I think the situation may be worse than that, but still remediable with quick action. I believe that the failed reconversion may be treated as a distribution, presumably unqualified. Fortunately, there still is time to complete a rollover (rather than a trustee-to-trustee transfer) before the 60-day rollover period expires. --Bob

Print the post Back To Top
Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29374 of 121219
Subject: Re: Roth IRA for Year 2000 Date: 2/20/2000 6:09 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<< If I understood Roy's article correctly, I think the situation may be worse than that, but still remediable with quick action. I believe that the failed reconversion may be treated as a distribution, presumably unqualified. Fortunately, there still is time to complete a rollover (rather than a trustee-to-trustee transfer) before the 60-day rollover period expires. --Bob >>

That makes sense, and would certainly solve the problem of the Roth "appearance" that I mentioned.

To the original poster: I'm not sure about this, and Bob expresses at least a little doubt. If Roy or someone else doesn't come in with a comment to clarify this for you within 48 hours, please repost as a new question, and I'll lurk and learn.

Phil Marti

Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29562 of 121219
Subject: Re: Roth IRA for Year 2000 Date: 2/22/2000 9:57 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
<< I converted shares from trad ira to roth in Jan-00.>>

No problem so far...

<< Then in Feb-00 I recharaterized them back to the trad ira>>

And that's your one bite of the apple. You are now restricted from reconverting back to a Roth IRA before the LATER of:

The beginning of the year following the year in which the amount was originally converted (1-1-2001 in your case) OR

The end of the 30 day period beginning on the day on which you transferred the Roth IRA back to a traditional IRA by means of a recharacterization (sometime in March 2000 in your example).

Clearly the LATER of these two dates is January 1, 2001.

<< and converted them back to the roth ira due to the recent stock pull backs.>>

Oops...here is your problem. You now have an "excess" reconversion. And you'll have to follow the excess reconversion rules. I didn't explain the excess reconversion rules in my original post, because I had no idea that the word hadn't gotten out yet, and there were actually people out there jumping back and forth in and out of Roth and traditional IRAs.

<< Having just learned about this new rule, this sounds like a failed converison.>>

It's actually an excess reconversion...with separate rules (of course). The reference in the original article to a "failed" conversion is really a slip of the keyboard, and a bit misleading.

<<My question: Can I still leave the shares in the roth ira at the Jan-00 price and ignore the Feb-00 recharaterization and converison back to the roth ira? Or will the shares now be stuck in the trad ira until the one year waiting period is up in Jan-01? >>

In effect, if you violate the excess reconversion rules, you effectively ignore any of those conversions deemed “excess” for tax purposes. The taxable conversion amount would be based on the last reconversion that wasn't considered an excess reconversion. Even though an excess reconversion will be ignored for tax purposes, it will still be treated as a valid Roth IRA conversion. You simply won't receive the benefit of a lower tax on the conversion.

So, what you really have is a Roth IRA. But you have lost any tax savings on your "excess" reconversion.

An very simple example:

In January 2000, I convert the traditional IRA to a Roth IRA. At the time of conversion, the FMV of the IRA is $30,000 (no basis). When I convert, I have $30,000 in conversion income.

In February 2000, the value of the Roth IRA drops to $10,000. I make a reconversion back to a traditional IRA. No problem. My $30k of conversion income is wiped out. I'm back where I started. And I must now wait until January 2001 to make another reconversion out of this account.

Instead, in March 2000 I reconvert to a Roth IRA (in violation of the time limits)when the FMV of the account is still $10,000. This is an "excess" reconversion.

Because it is an excess reconversion, the Roth IRA is still valid, but the conversion income REVERTS to the original conversion...or $30k in this example. The penalty is obvious: you end up paying tax on the $30k of conversion income, when your Roth IRA has only a balance of $10k. It makes no sense. But if you want a Roth IRA THAT BAD...you can certainly do it.

If you decide that you really don't want your Roth IRA that bad, you can invoke the "failed conversion" rules, move the Roth IRA back to the traditional IRA, and you'll be in exactly the same place that you started out. You have a traditional IRA. You'll have no conversion income to report. No taxes. No penalties. And you'll have to wait until January 2001 to make any additional conversions.

How would you complete the Form 8606? I have no freakin clue. And if any of my clients do this (after all of the warnings that I've given them over the last year), I'll either fire 'em or make them pay a substantial retainer before I tackle the Form 8606.

If anybody wants to discuss this in greater detail, let's start a new thread. As you can see, I'm a bit behind on my posts to the folder, and I don't want to miss any of this discussion by failing to look back far enough.

TMF Taxes
Roy



Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev Thread | Next Thread
Advertisement