Method for computing taxable distribution after Roth recharacterizatio

[Guest MBBrutman]

I'd like a method for computing my taxable IRA distribution. The method needs to take a recharacterization into account.

Intuitively it should work like this:

[1] First conversion: taxable amount is the distribution from the original IRA to the Roth IRA.

[2] After recharacterization: The Roth IRA is transferred back to the original account, erasing the original conversion. It is then converted into a Roth IRA once again. The tax should be on this new distribution from the original IRA to the Roth IRA.

My mutual fund company sent me horrible paperwork, and there was some lag time between when my Roth IRA was "uncoverted" and reconverted, so it is not clear what the distribution was. The phone reps have not been too helpful; I received conflicting information. The 1099-R form looks as though all distributions have been added together.

So, how do I do this?

Thanks,

Mike

[BPickerCPA]

You need to know the value of the first conversion and the second conversion. The first conversion is "canceled" by the recharacterization, leaving the second conversion as the taxable amount.

Just be glad you didn't do a PARTIAL recharacterization. Then the paper work would be horrendous.

[Guest MBBrutman]

I think I've finally got the values of both of the conversions. Yes, after looking at form 8606 I'm very glad that I didn't do a partial recharacterization.

Part II of the 8606 is confusing; should I pretend that the first conversion never took place and only enter numbers that reflect the second conversion, or should I be doing something special to reflect the fact that I had two conversions? The F8606 instructions are not clear, and they don't address how to handle multiple conversions.

Part III: Assuming that I have to use numbers that reflect both conversions, do I have to treat the recharacterization from the Roth back to my traditional IRA as a Roth IRA distribution? Or does Part III even apply ...

I think I need professional help!

BTW, I did the recharacterization based on advice I first heard on NPR's Sound Money. After hearing the term, I found your article ("Reversing a Roth Conversion") and made the switch. My IRAs are modest, but it should make quite a difference on my taxes. Thanks!

Mike

[BPickerCPA]

Part III does not apply.

Fill out part II using the total of BOTH conversions on the conversion line,a nd the amount of the FIRST conversion on the recharacterization line. That should leave you with a net equal to the SECOND conversion.

[Guest Mallo]

Other than by going directly back to the stock prices for your IRA on the date of the reconversion, is there another way to calculate the taxable amount given the information only on the Form 5498? They report only the total of the distributions and I've heard the IRS wants a letter enclosed that tells them how you calculated the taxable portion. Do I simply say in the letter "That's how much those funds were worth on the date of the last(and in my case only)reconversion."? Seems too simplistic given that if that's the only way to calculate the taxable portion it will be the content of all letters. I guess I should say that mine is not a partial conversion.

Thanks for any help,

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mallo

[Guest MBBrutman]

Believe it or not, that is what I guessed on my first pass through!

Thanks for the help,

Mike

MBBrutman@aol.com