partial ROTH recharacterization

[Guest gw55]

Hi,

I converted 50K from IRA to a new ROTH this year (both accounts are at Fidelity).

But, I now believe that ROTH conversions may not be a good solution for me.

And, so I am considering recharacterizing some of that money back to my IRA.

Unfortunately, I moved 20K of that 50K to a credit union (CD).

So, a full recharacterization is not possible, I believe.

The ROTH account has 32K (2k gains) now.

One plan is to recharacterize 25K of that 32K back to my IRA.

Since this is a partial recharacterization, I would have to calculate

the increase in value of the CD and the ROTH account and prorate

the amount to recharacterize. Something like 27K now would

represent 25K at conversion. Does this sound reasonable?

It would save about $2,500 in taxes now.

regards,

gordon

[John G]

I understand that most major custodians, like Fidelity and Schwab, have handled recharacterizations many times and have proceedures for allocating earnings to assets that are moving back. Call your custodian and discuss the circumstances.

In your example, you indicate a tax impact of $25K of just $2,500 or 10%. A conversion where you only pay 10% taxes should look very attractive.

Don't forget to include state income taxes when you do the math.

[Appleby]

A full recharacterization would be accomplished if you recharacterize both accounts that include the converted assets.

I agree with John…to determine the exact amount you need to recharacterize, you need to perform a specific calculation to determine any earnings/loss on the amount being recharacterized. For instance, if you decide to recharacterize $25,000 of the $50,000 you converted, a calculation must be done to determine the value of the $25,000 at the time the recharacterization occurs.

See the attached document ( TD 9056) for instructions on calculating the amount to be recharacterized .

Not all custodians perform the calculation

TD_9056.pdf