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Gentlemen,
If I may impose on you for a moment, this is my situation regarding recharacterization of Roth IRA and the steps I plan on taking to achieve a tax benefit due to depressed values. Do I have it right or will I crash & burn?
2 existing Roth's, 1 is contributory with Ameritrade for FY1998(approx. 2% increase since established), 1 is rollover with Kaufmann Fund from previously established (c. 1995) Traditional IRA (significant decrease since rollover). Funds in Traditional IRA were all deductible contributions.
Step 1 - Liquidate & Transfer Kaufmann to Ameritrade Roth;
Step 2 - Unwind entire Ameritrade Roth to Ameritrade traditional IRA (transfer notification specifying that this is a recharacterization of Roth IRA);
Step 3 - Convert traditional IRA back to Roth IRA.

If I understand correctly the amount converted in Step 3 is the amount for which I incur the tax liability. Any potential tax liabilities from the initial contribution and rollover are superseded by the unwinding and reconversion. As asked above will this fly or flop?
TIA
PhuzzPhool
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Phuzz asks:

If I may impose on you for a moment, this is my situation regarding recharacterization of Roth IRA and the steps I plan on taking to achieve a tax benefit due to depressed values. Do I have it right or will I crash & burn?
2 existing Roth's, 1 is contributory with Ameritrade for FY1998(approx. 2% increase since established), 1 is rollover with Kaufmann Fund from previously established (c. 1995) Traditional IRA (significant decrease since rollover). Funds in Traditional IRA were all deductible contributions.
Step 1 - Liquidate & Transfer Kaufmann to Ameritrade Roth;
Step 2 - Unwind entire Ameritrade Roth to Ameritrade traditional IRA (transfer notification specifying that this is a recharacterization of Roth IRA);
Step 3 - Convert traditional IRA back to Roth IRA.

If I understand correctly the amount converted in Step 3 is the amount for which I incur the tax liability. Any potential tax liabilities from the initial contribution and rollover are superseded by the unwinding and reconversion. As asked above will this fly or flop?


Well, I can't speak for KAT nor am I certain he still reads this folder, but as for me, I'd take the following steps:

1. Establish a traditional IRA with a zero balance at Ameritrade for the purpose of receiving recharacterized Roth IRA contributions/conversions.
2. In writing, notify them you wish to transfer the contributory Roth IRA in its entirety to this new traditional IRA as a recharacterization of the original Roth contribution.
3. In writing and by a separate letter from that in step 2, notify both Ameritrade and Kaufmann that you wish to recharacterize the conversion Roth IRA at Kaufmann as a traditional IRA rollover through a direct transfer of the entire conversion Roth IRA to the new traditional IRA at Ameritrade. Both may require you complete some forms to do so.
4. After the money is all in the traditional IRA and again in writing, notify Ameritrade you wish to convert that traditional IRA to a Roth IRA at Ameritrade. Complete the necessary forms as required to do so.
5. Ensure all this is complete by 12/31/98 to ensure you can still use the 4-year spread for conversion income to lessen the tax bite.

The above steps seem more clear-cut to me so there is no possibility of the IRS claiming foul. The monies don't get mixed until they hit the traditional IRA and you have a written audit trail of the recharacterization process. Of course, this assumes you have met all the pertinent limits for IRA contributions and Roth conversions. The recharacterization of the Roth contribution will be non-deductible (probably ) in the new traditional IRA, but all that does is lessen further the tax bite on the reconversion.

Regards…..Pixy
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Thanks Pixy,
Good point concerning not mixing funds until hitting traditional IRA, and the well documented trail is imperative .
Phool On
PhuzzPhool
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Thanks Pixy,
Good point concerning not mixing funds until hitting traditional IRA, and the well documented trail is imperative . Phool On
PhuzzPhool
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