IRA Recharacterization and Conversion rules

[NorthernInvestor]

Hi,

I've gotten into a predicament with my wife and my IRA contributions this year as we're trying to do our first ever "backdoor" roth IRA contributions.  As background, I'm a military doc and have contributed to both my wife and my roth IRA accounts directly over the years as our income has never exceeded the maximum limit.  This past year, though, moonlighting has put us over the limit.  This is how our year has gone so far:

Jan-Jun '16- small monthly contributions directly to our roth IRAs ($825 total each)

Jun '16- I realize that our AGI will be over the limit to contribute directly to a roth so we stop contributing directly

Sep '16- open traditional IRAs with the intent to convert nondeductible contributions to our roth IRAs.  At the same time I recharacterize our 2016 contributions from roth to traditional.

Oct '16- now desiring to convert our nondeductible traditional IRA contributions to our roth IRA accounts:

Two questions:
1- The $825 we contributed earlier in the year appreciated to $880 when it was recharacterized.  If we convert this appreciated amount, in addition to the remaining $4675 we contributed to our traditional IRAs this past month, will we be over the contribution limit of $5,500 for the year?

2- The IRS website has the following rule for recharacterizations and conversions:

"Is there a minimum waiting period to reconvert the money to a Roth IRA following a recharacterization?

Yes, if you recharacterize all or part of a rollover or conversion to a Roth IRA, you cannot reconvert the amount recharacterized to the same or another Roth IRA until the later of:

• 30 days after the recharacterization, or


• the year following the year of the rollover or conversion.

The waiting period to convert applies only to amounts you recharacterized. For example, you can convert amounts from a different traditional IRA to a Roth IRA immediately."

 

Does this imply that I can only convert the $4,675 to roth this year and wait till next year to convert the remaining $825 next year?  The wording is confusing as it sounds like money that is recharacterized TO a roth IRA cannot be reconverted to the same or another roth IRA.  Does this make sense?  I don't understand why you would convert money you recharacterized to a roth to another roth as I thought you could only have one roth IRA.

Thanks for any help!  As you can tell, I'm a complete novice to investing but am interested in becoming more educated.

Fernando

[PenguinMD]

First off do you have any other IRAs? And rollover IRAs? Excluding 401k and ROTH.

I've been through this a couple times here's my experience.

Must people are doing these steps:
1) contribute to Traditional IRA
2) Convert to Roth
3) come next year high my investments lost money having second thoughts, I should recharacterize
4) When recharacterize then have the limit of the 30d or 1yr from the original conversion (step 2) whichever is longer

You're a bit different as you accidentally contributed to your Roth when you should have contributed to an IRA, we did the same thing when we become hit the income limit.

In this case you just rewind the clock as if you contributed the original amount as if you did a traditional IRA vs a ROTH.

I had this happen with Fideity and a quick phone call they were able to setup the reharacterization and move the money plus any gain (or loss) into the account. They will also generate all the necessary forms you need to easily stick it into TurboTax.

Since in your case you should only need to wait the 30d post recharacterization as you never did the original conversion -- but you can ask your financial institution for verification. Although, in my case they confused my conversion date with my recharacterization date so had to remind them .

TIP: when you do your Traditional IRA to Roth do yourself a favor and stick it in a SEPERATE Roth account this will let you "reverse"/recharacterize that conversion if by next year your investments all went down and don't want to pay tax on gains that are no longer there (of course if you converted when you had no gain then this doesn't matter since all the money you already paid tax if it's all non-deductible amounts).

Also if you have a copy of turbotax you can also start playing with different scenarios and see how it all works. This can help you understand what's going on and he tax implications.

Good luck!

NOTE: I'm NOT a CPA nor do I play one on TV .