Partial recharacterization of multiple conversions from traditional IR

[Guest Ken Behrens]

Multiple conversions from traditional IRAs in the same year are allowed. My question: Since only one recharacterization is allowed per year, can it be just one of the conversions?

Example: Three funds owned within same fund family.

Partial of fund A converted in January

Partial of fund B converted in May

Partial of fund C converted in August

If fund B tanks during year, can only fund B be

recharacterized in December?

Answer any different if funds were in different families?

Thank you

[BPickerCPA]

You can recharacterize EACH conversion. You are not limited to only one recharacterization per year.

However even if you only recharacterize fund B, the computation of how much of the original conversion you've "canceled" will be based upon the value of all of the funds.

[Guest Ken Behrens]

Thanks for your prompt reply Mr. Picker.

I thought I could recharachterize one fund using only that conversion price, but I guess I was wrong.

I am 67 years old and recently retired. Most of my savings are tied up in traditional IRAs. I am a great fan of the Roth IRA and would like to use it as much as I can. My game plan is to convert a portion of the IRA each year and pay the taxes with after tax savings. I have three years before I have to start minimum required distributions, which unfortunately cannot be converted into the Roth. I do plan to continue converting, but on a smaller scale, after starting the MRD.

I actually started the conversion this year. I thought it was a good time after the market dipped last March. The conversion I made still turned out to be bad timing as the market went even lower. Right now I am pretty much even with the conversion price.

What I am looking for is some strategy for future years for making the conversions. I know you can recharachterize and reconvert, but it has to be the following year, and I don't want to waste a year.

Any ideas?

Thanks,

Ken

[John G]

I think the question you are asking is how can I time the market. The answer is you can't. If you see a bone crushing correction, you clearly may be tempted to convert at the "low price". The problem is that you can never be sure at what point you have the bottom. It is probably wiser to spend time thinking about your actual investments then spending time on evaluating conversions and recharacterizations.

I have been investing for 20+ years, my folks for 40+ years. I can think of only one instance when we bought a stock on the very day it turned around and started to move up. We never sold any stock at the peak.

Note, recharacterization is not forced to be in the year following a conversion, it can happen in the same year.

Since you plan to do conversions in installments, you are sort of echoing the "dollar cost average" concept.

Besides the market flucuations, the conversion process it self makes it hard to optimize. Most custodians put a conversion request in the que, the paperwork lag may be anywhere from a day to weeks, so you have little control over the "timing".

[Guest Ken Behrens]

Thanks for your input John.

I realize recharachterization can occur the same year, but a reconversion must wait until the following year.

I may be trying to time the market, but in a round about way. I am not selling or buying funds, but trying to time the best time of switching to lower the tax bite. It is hard to swallow the fact that after paying taxes on the conversion you find yourself with a lower valued investment.

Thanks,

Ken

[BPickerCPA]

If earlier in the year you converted traditional IRA A into Roth IRA AA, you can now convert traditional IRA B into Roth IRA BB. You can later recharacterize the conversion that's in Roth IRA AA, and you have not run afoul of any rules.

You just have to make sure you do it the right way.

Barry

[Guest Ken Behrens]

Barry,

I'm confused. Your last post seems to contradict your earlier post. Let me use an example.

In March $50,000 from traditional IRA A is converted into Roth IRA AA

In October $50,000 from traditional IRA B is converted into Roth IRA BB

In December Roth IRA AA is worth $25,000 and Roth IRA BB is worth $75,000.

In December Roth IRA AA is recharacterized back to a traditional IRA.

Taxes would have to be paid on how much? $50,000?

[BPickerCPA]

You've converted $100K and effectively recharacterized $50K, so you will be taxed on $50K.