ROTH Recharacterization

[Guest ginag]

I am hopping for some help with and area that I do not deal with very often. I have a cllient who converted some stocks from her traditionall IRA to her Roth account in 2001. The value of the stocks at the time of conversion was $16000. ( this was a mere conversion of existing stocks- not a new contribution) After the conversion, the total value of the stocks dropped to $8500. She would like to recharacterize the entire shares of stocks back to a traditional IRA. ( she wants to "undo" the conversion" )

Because she is putting all of the stocks back into another IRA, and becuase she had a loss and merely wants to act as if the original amount was never convreted, it seems to be OK. I have looked into this , and it appears that she can merely recharacterize the assets to a second tradtional IRA, thus making the intitial conversion be a mere transfer of assets from one tradtional IRA to antoher. Her financial planner wil not allow her to do the recharacterization. He said that, if she does, she will be required to pay taxes on the amount of loss( $7500) Or, she will need to move an addtional $7500 from her Roth to her IRA. Please advise me- I dont' know what I have overlooked, but it seems to me that she should be able to "undo" this mistaken conversion.

Thank you,

Gina

[BPickerCPA]

Her financial planner is obviously ignorant of the Roth recharacterization rules. This always makes me question what else he might be missing.

If she converted into a brand new Roth, and she moves the entire account back to a traditional IRA (it need not even be a new IRA; it can be the original), the entire conversion is negated and no tax is due. She CANNOT move more funds to make up the loss. That's asking for an excess contribution penalty.

[John G]

I agree with Barry, the financial planner is clueless. How can you do business with someone so adament about a policy and clearly is dead wrong. This is Roth 101 stuff, very basic issues about recharacterization. I guess the guy never bothered to read IRS Pub 590. Time to find a new advisor.

The clock is ticking on your recharacterization. This is the busy season for IRA desks. You need to talk with your custodian, prepare a letter of instructions. THEN, follow-up to make sure the custodian gets the job done. We have had lots of people post on this message board about missing letters of instruction, delays in getting action and eroneous custodian statements to IRS. Don't deal with a general clerk. Talk with someone in the IRA area who will be familiar with the details.

I hope you have a more knowledgable tax preparer!