| Backing out of IRA to Roth IRA conversion |
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efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
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| Backing out of IRA to Roth IRA conversion |
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If I did a like kind conversion of 400 shares of a particular stock (that pays no dividend) from IRA to Roth IRA and that stock dropped with no signs of recovering for some time, can I undo that conversion like it never happened? Is that considered a recharacterization or reconversion? No tax was withheld because tax for the conversion is or would have been covered outside of the conversion.
Not a big deal, just trying to figure out if I can save paying $265 tax for a $1060 loss since the conversion, or use the $595 total tax of the conversion towards converting something more stable.
I can't do anything about shares I converted last year. But I converted 400 shares of ABP worth $2380 IRA to Roth IRA 1/6/06. Currently it is worth $1320 (down $1060). So I am trying to figure out if I can undo that conversion by transferring the same shares back to the IRA like it never happened with untaxable loss of only $1060 instead of that plus the $265 tax ($1325 total).
I also converted an ETF that is down $449, but nearly doubled in past 3 years and is showing signs of life, so I may sit on that. All other conversions worked to my advantage.
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Wed Oct 11, 2006 3:12 am |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
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If I'm reading correctly what you're asking, I believe the answer is "yes".
You should be able to recharacterize your Roth conversion contribution back to a traditional IRA. You might want to run this past your tax guy first for confirmation...
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Oct 11, 2006 1:36 pm |
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efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
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For tax deferred (deductable) contributions in an IRA, you only pay tax when you draw money out, and losses along the way just cancel out gains (balances out with no tax liability or credit). So you never really pay any tax on losses.
When you convert IRA assets to a Roth IRA, you pay tax (typically for the year converted) on the tax deferred amount converted. If you then have a gain, you never pay tax on the gain (once qualified). But if you have a loss, you get no tax break (unless you still have a overall loss after drawing all money out and can prove it). So in a 25% tax bracket if that asset sinks $1000 after converted, you ended up paying $250 tax on that $1000 loss, resulting in $1250 loss vs. $1000 loss cancelling $1000 worth of gains in a regular IRA.
If I could recharacterize that from the Roth IRA back to the IRA like it had never happened, I would save the tax applied to the conversion, or could apply that tax to a more stable or growing conversion.
What I have not been able to find an example of is if I did multiple like-kind conversions this year and those shares of that stock have NOT been traded and paid NO dividends, and just wanted to recharacterize (undo) that particular block of stock back to the IRA and get full credit for that conversion, or would the credit be based on an average of all conversions?
It is different if you convert cash and some of it earns interest and some is invested, since you cannot track the gain/loss of a particular dollar. But if a particular asset is isolated and intact like it was at time of conversion (no untrackable gain/loss) would income/loss of the recharacterization just apply to that specific asset, rather than the account as a whole since the conversion?
It looks like it has turned around and is up 19% since its 52 week low 10/4/06, so maybe it is finally time to add to it for a quick bump into heating season (small gas/oil company).
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Fri Oct 13, 2006 3:03 am |
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efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
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I finally found something that somewhat fits my situation, example 4 on p.134 of http://www.irs.gov/pub/irs-irbs/irb00-30.pdf where 2 stocks were converted at the same time, one gain and one loss. But my non-loser is complicated by dividends that earned interest mixed with other investments and trades, so isolating that particular 2 stock conversion is impossible. Gain/loss would have to be calculated based on percentage of conversion to the whole account since Jan. 6 (which would snuff the loss).
The IRS conclusion is that: Regardless of the amount recharacterized, the determination of that amount (or of the net income allocable thereto) is not affected by whether the recharacterization is accomplished by the transfer of shares of ABC Corp. or XYZ Corp.
Oh well. My retirement accounts gained more just on Friday the 13th than that little loss, so it is not worth messing with. Chalk it up as a learning experience (stick to riskiest ventures in IRA and more conservative in Roth IRA).
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Sat Oct 14, 2006 5:42 pm |
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