Further Note on Roth IRA Recharacterization/Conversion

In my earlier post on Roth IRA conversions, I noted that if you converted an IRA into a Roth earlier this year it may make sense to recharacterize the funds if the value of your account has slumped and you still owe taxes on the earlier, larger conversion amount. I also stated that you can’t go back this year and do another conversion. However, I realized that there is a way to sort of do a conversion/recharacterization/reconversion.

If you do a partial conversion of an IRA and later recharacterize it, you can do another partial conversion of different funds from the IRA without breaking the rules.  You need to be able to prove that you aren’t re-converting the same funds that you recharacterized.  The clearest way to do this is to do the second partial conversion before the recharacterization.  The order of events would be as follows:

  • Do a partial IRA-to-Roth conversion
  • Regret your earlier decision because the markets have tanked
  • Do a second partial IRA-to-Roth conversion into a different Roth account, so that it is easy to show that these are different funds
  • Do a recharacterization of the first partial conversion

Obviously, this is only worth doing if it saves you a meaningful amount of income tax on the first Roth conversion.  As always, you should consult with your tax adviser to be sure that this strategy is appropriate for your specific situation.

About the author

Thomas Fisher, CFP®

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