Re-characterization mechanics at Fidelity

[Neill]

This is my first full tax year not working unless you count the ~$100 I earned on Amazon mechanical turk. I planned out in advance how much I would be able to convert from IRA to Roth IRA at the start of 2016 and did this conversion. Of course you don't really know your tax situation till you get all the paperwork and understand your new situation. So toward the end of 2016 I did a large conversion that I can use as a buffer should I have under estimated. I did it to a stand alone account which I plan to do in the future. I may even do the multiple asset class strategy with multiple accounts in the future.
Well I did underestimate because I didn't realize I could itemize medical premiums since they are now paid after tax.
So now I know how much I need to re-characterize (though I won't do it until tax time as stuff can change and often does) I started thinking about the mechanics.
Can Fidelity re-characterize an exact dollar amount or do you have to wait to find out how much was re-characterized after it's done? Can you do it after market close to maybe help with the uncertainty etc? I have never done this step and figure people have before. Better to think about it up front.
Thanks.

 

[pb4uski]

How it works is that your tell them the dollar amount that you want to recharacterize. In my case, it was the amount that I exceeded the 15% tax bracket when I finalized my return. They process that amount and that is the amount that you reduce your recharacterization by. The actual amount transferred back into your tIRA will be slightly different because they adjust for dividends and growth of the recharacterized shares between the conversion and the recharacterization dates... so it essentially puts each account in the same position as if you had converted the exact amount of shares after the recharactization.

Something like that anyway.

 

[Neill]

How it works is that your tell them the dollar amount that you want to recharacterize. In my case, it was the amount that I exceeded the 15% tax bracket when I finalized my return. They process that amount and that is the amount that you reduce your recharacterization by. The actual amount transferred back into your tIRA will be slightly different because they adjust for dividends and growth of the recharacterized shares between the conversion and the recharacterization dates... so it essentially puts each account in the same position as if you had converted the exact amount of shares after the recharactization.

Something like that anyway.

Thanks. So that sounds like the exact dollar amount. Like you it's the amount that I exceed the 15% tax bracket by as my marginal rate is high above that.

 

[bingybear]

I've found in the last two years that I can easily figure pretty much the right amount to convert late in the year. By that time all the investment distributions are known if not paid. This way I have avoided re-characterization. If you are going to wait until the end of the year... you could do this going forward. But it doesn't sound like re-characterization is all that big of a deal.

Others will convert early in the year and if the investment does not perform well, then they re-characterize to not pay as much in tax since the investment lost $

 

[Neill]

I've found in the last two years that I can easily figure pretty much the right amount to convert late in the year. By that time all the investment distributions are known if not paid. This way I have avoided re-characterization. If you are going to wait until the end of the year... you could do this going forward. But it doesn't sound like re-characterization is all that big of a deal.

Others will convert early in the year and if the investment does not perform well, then they re-characterize to not pay as much in tax since the investment lost $

The problem for me is predicting the dividend income. I can use the year end figures to work out the actual dividends. I can use the published QDI values to work out the qualified dividends. Problem has been the return of capital values for stuff like VNQ. I think some of the return of capital in a Schwab fund has actually delayed my 1099-DIV in the past. It's also not uncomon for me to get corrected 1099-DIV's later. I think foreign income and foreign qualified dividends for the foreign tax credit are also a problem.

 

[bingybear]

The reits could be an issue as you note with the ROC. I don't tend to hold much of that in taxable accounts.

How much of a distribution is qualified or not likely does not effect the value of roth conversion. It can have a large difference in taxes, but it still pushes you closer to the top of the 15% bracket... qualified or not.

I'm not sure how foreign dividends /foreign tax really changes the taxable income reported at tax time verse the distributions that are projected late in the year. Even if they pay tax with the distribution.. .skip that. I guess they may pay tax with a distribution that is not really announced by year end. Don't know for sure.

I don't try to do conversions to the penny. I could see some investments like MLPs could also make it difficult with some of the things they throw off.

 

[pb4uski]

That's the thing I like about recharacterizations... I come up with a good estimate late in the year and round it up and convert that amount... then do my actual tax return and recharacterize any excess over the 15% tax bracket since my marginal tax rate above 15% is 30% for quite a bit and I loathe paying 30% almost as much as I loathe forgoing the opportunity to pay only 15%.

My taxable income has been exactly equal to the top of the 15% tax bracket the last 3 years.... works well of me.