2008 Conversion Timing; Recharacterization Strategy

[Guest MSDalt]

Depending upon 2008 year-end mutual fund distributions, my wife and I may be under the $100K threshold which currently prohibits conversion of Traditional IRA assets to a Roth IRA.

Can I wait until 2009 (after I have the eligibility-determining information I need) to make the conversion - before filing my 2008 tax return - or must I make the conversion in 2008, possibly resulting in the need to recharacterize if our AGI exceeds $100K?

If I must convert in CY 2008, can I convert more than one Traditional IRA to different Roth IRAs and recharacterize selected conversions, to control our 2008 taxable income?

Thanks,

Michael

[John G]

1. Conversion must occur in this calendar year. Given all the turmoil in brokerages, I would start ASAP because you made need even more cushion this year. Once you submit the paperwork, you need to watch frequently to see that the conversion occurs.

2. Yes you may recharacterize all or part. But, remember that the Roth conversion amounts do not effect eligibility.

I will repeat the advice I have posted many times here. Go spend a couple of hours with your tax advisor or accountant. Run through the scenarios. Get their "second" opinion on the adviseability of the conversion. There are many technical issues (such as your tax filing status) that impact the decision. Making a mistake can be very costly. Spend that $300 or so from a professional.

One possible advantage of conversion this year is that stock prices are very depressed, which a likely to owe less than if you converted a year ago.

[Appleby]

If I must convert in CY 2008, can I convert more than one Traditional IRA to different Roth IRAs and recharacterize selected conversions, to control our 2008 taxable income?

Thanks,

Michael

To add to John's response...one supposed advantage of converting to separate Roth IRAs, is that it makes it easier to recharacterize a portion of the conversion. This is because you may not need to run a calculation for the NIA.

Example: If you convert 50% to Roth IRA # 1 and 50% to Roth IRA #2, and you decide that you want to recharacterize only 50% of your conversion, then you would recharacterize the entire balance of one of the Roth IRAs and that would be that. But if you converted 100% to Roth IRA #1 and decided you want to recharacterize 50% of the conversion, you would need to compute the NIA, and increase/decrease the 50% by the NIA in order to determine the actual dollar value of the recharacterization.

It is for this reason that some thinks it’s a good idea to keep the conversion amounts separate until the deadline for recharacterization has passed, at which point they can be combined. But the calculation is not complicated- even easier if your financial institution will perform the calculation. Therefore, if keeping the accounts separate means two maintenance fees, and two ticket charges if you want to buy 100-shares of a stock and need to place trades in both accounts in order to do so, it may not be worth it to maintain two Roth IRAs. Bottom-line is that it’s a personal choice.

[jevd]

sage advice on the separate account. I converted shs at $20 & into an account already established. I thought that was bottom.

Now shs are valued at $2 but the rest of the account only lost 35%. Worst thing to do other than the conversion is to re-characterize as I would be moving tax free assets back to tax deferred and paying taxes again. Any gain acheived would probably not be worth it. I'll take the hit on taxation on the original transaction (not that much) and hope some day ( 10 years or so ) that it won't matter as much.