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Costly Lesson Learned about Roth Conversions
Old 04-26-2014, 01:34 PM   #1
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Costly Lesson Learned about Roth Conversions

I have been converting TIRA money to Roth for a few years now. I thought I had been calculating my conversion amount so that I would get just under the point I was tipped into a higher tax bracket. I did the calculation a few years ago and have converted that same amount every year.

However, another post on this forum got me thinking and I went back and ran some what-ifs with TurboTax. I discovered that last year, I could have converted 50% more money and actually had a reduction in my tax liability because of the increased ability to use foreign tax credits. I haven't been able to use all of them for some time, but increasing the Roth amount also increased the amount of the foreign tax credits. After these are all used up, this won't work the same way.

There is no way to have a do-over and increase the conversion amount because the deadline for conversion is December 31 of the tax year. However, since the deadline for recharacterization extends into October of the year following the tax year, I'm going to convert more than I think I need and then recharacterize the following year to get me to the optimal amount. Does this sound like a good plan?

I've done a recharacterization in the past, but it was in the same year as the original conversion, so my 1099-R was correct. I'm wondering, if I follow the plan outlined above, will I get a new 1099-R right after the recharacterization, or does this somehow get sorted out at year end?

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Old 04-26-2014, 04:20 PM   #2
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I don't think you get the 1099R until after the yr ends. You're supposed to attach a narrative describing the recharacterization so IRS doesn't get confused by why your tax return doesn't match the existing 1099R.
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