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Subject:  Re: Rechar of Roth 'conversion' v. 'contribution Date:  10/12/1999  8:36 AM
Author:  TMFPixy Number:  14434 of 103189

Mkraft asks:

<<Is there any reason to decide to recharacterize a Roth 'conversion' but *not* a Roth 'contribution'?

In particular, if someone recharacterizes a 'conversion' because it will be taxed mostly (or completely) in a higher bracket, is there any reason not to recharacterize a 'contribution' in the same circumstances?>>

A contribution comes from after-tax earnings and is limited to the lesser of $2K or gross wages for the year. A conversion is unlimited and comes from the transfer of a traditional IRA. In the latter you could convert at a market price or $100K as an example, and all of that $100K becomes taxable in the year of conversion. A week later the same investment might be worth $50K. That means you would pay income taxes on $50K that no longer exists. The recharacterization allows you to avoid paying taxes on that phantom income. You could recharacterize and then reconvert so taxable income would be at the $50K level. You would thus lower your tax bill for the year. On the contribution, a recharacterization saves nothing. The contribution will be taxed anyway, and the earnings don't count as income. Therefore, you would be taking a nondeductible contribution from something where the earnings would eventually come out tax-free and put it into something else where the earnings would eventually come out to be taxed at ordinary rates. Even if you then reconverted, nothing has been gained except to reestablish the taking of tax-free earnings. Your tax bill for the year remains the same. Therefore, why recharacterize a Roth contribution?


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