Roth Conversion Question

[ronocnikral]

my thought is...TIRA w/ $100k. it only makes sense to convert $20k in one year b/c of tax bracket limitations. So, I convert the $20k in Jan 2012 to RIRA, jumping through all the hoops mentioned above. I wait until Oct 2013 to recharacterize, finding out my investments lost 10%. So, I save 15%*20k or $3k in taxes starting in Oct 2013 and another $18k in the TIRA. I can only convert $20k/year without jumping up to the next bracket, so does my next conversion happen Jan 2013? or oct 2013?

ahhh...i'll have to put together an overly complicated spreadsheet to figure this all out...seems like if you believe in longterm growth and you have a cap how much you can convert and you'll be doing this over many years, you'll most likely save very little or a marginal amount. Running bum's scenario is one where a person can realize a significant gain.

 

[kaneohe]

this might be helpful Roth IRA Reconversion to Reduce Taxes

The section at the bottom about partial recharacterization is interesting.
The rules you may be thinking about re: timing of recharacterization and
then reconversion likely pertain to when you do a total conversion.
It looks like you have a lot more flexibility if you do a partial conversion/recharacterization with the timing of the second conversion because you are using different $$$.

 

[RunningBum]

I wouldn't recharacterize for a 10% loss. It's not worth it, and it might well recover before you can reconvert.

I was just looking at my 2011 conversion and I think I'm going to recharacterize some of that for a different reason. I converted a lot last year because it was my last year of work income so divs and CGs were already at 15% and I wasn't hitting the phantom 30% bracket (15% income + moving divs & CGs from 0 to 15%). I went well into the 28% tax bracket and also triggered AMT, which I didn't expect. I ran a turbo tax scenario with a smaller conversion and found I can get out of the AMT, and I also want to not go into the 28% bracket. So, I'm going to recharacterize some of it, even though it had a small gain in a bond fund, to get back about 30% in taxes for that amount. When I reconvert it in chunks it'll be mostly at 15% with maybe a small amount to take as RMDs after age 70. I'm bringing back 90K, so if I save 15% on all of it it'll be $13.5K in taxes saved. This is all due to my mistake in converting so much in the first place so I could've saved all that up front and not be waiting for the money back from the treasury dept after I file a 1040X, but it's still nice to be able to undo my mistake.

I'll tell you what, the Roth IRA is a good deal but I've made so many mistakes with it. All have been correctable but it's caused me a lot of work.

 

[ronocnikral]

this might be helpful Roth IRA Reconversion to Reduce Taxes

The section at the bottom about partial recharacterization is interesting.
The rules you may be thinking about re: timing of recharacterization and
then reconversion likely pertain to when you do a total conversion.
It looks like you have a lot more flexibility if you do a partial conversion/recharacterization with the timing of the second conversion because you are using different $$$.

But, if you have a cap at how much you can convert per year, recharacterizing limits how you can play with the partial conversions.

I wouldn't recharacterize for a 10% loss. It's not worth it, and it might well recover before you can reconvert.

I was just looking at my 2011 conversion and I think I'm going to recharacterize some of that for a different reason. I converted a lot last year because it was my last year of work income so divs and CGs were already at 15% and I wasn't hitting the phantom 30% bracket (15% income + moving divs & CGs from 0 to 15%). I went well into the 28% tax bracket and also triggered AMT, which I didn't expect. I ran a turbo tax scenario with a smaller conversion and found I can get out of the AMT, and I also want to not go into the 28% bracket. So, I'm going to recharacterize some of it, even though it had a small gain in a bond fund, to get back about 30% in taxes for that amount. When I reconvert it in chunks it'll be mostly at 15% with maybe a small amount to take as RMDs after age 70. I'm bringing back 90K, so if I save 15% on all of it it'll be $13.5K in taxes saved. This is all due to my mistake in converting so much in the first place so I could've saved all that up front and not be waiting for the money back from the treasury dept after I file a 1040X, but it's still nice to be able to undo my mistake.

I'll tell you what, the Roth IRA is a good deal but I've made so many mistakes with it. All have been correctable but it's caused me a lot of work.

I believe the recharacterization rule was put in place for situations like this. It's difficult for a lot of people to gauge what their taxes will be before the end of the year.