A question to the floor about Roth recharacterizations

[Ed_The_Gypsy]

It sounds like you're trying to "lock in your loss"? That tends to work better for fourth quarter activity as opposed to first quarter activity.

True--locking in the loss for tax purposes. The reason I am thinking about it now is that energy stocks have taken a big hit and I am guessing that they will start to grow again shortly. But I have been wrong many times before.

 

[pb4uski]

Yeah, I know. And worse than that, for me, is the administration wants to force RMDs to apply to Roths. Whenever all this appears in the press, it is usually pooh-poohed as ain't gonna happen. Maybe, maybe not. The forces to tax retirement savings are strong.

I guess I wouldn't have a lot of heartburn if they imposed RMDs on Roths since the withdrawals wouldn't be a taxable event like deductible tIRA withdrawals are.... it would just put curbs on the ability to continue to have the roth grow tax-free.

 

[harley]

I guess I wouldn't have a lot of heartburn if they imposed RMDs on Roths since the withdrawals wouldn't be a taxable event like deductible tIRA withdrawals are.... it would just put curbs on the ability to continue to have the roth grow tax-free.

I'd be pretty unhappy about it, as I am hoping to use the Ed Slott skip-a-generation inheritance idea. At the same time, I've always thought the Roth rules were too good to be true. I'm going to take advantage of them as long as they exist, though. At least if they do start requiring RMDs I'll have converted a lot of my tIRA money into a tax free distribution at a low tax rate (10-15%). If I was forced to take it all from the tIRA in my later years I'd be getting hammered with taxes. And DW, assuming she outlives me, would get torpedoed.

 

[kaneohe]

.....................

In January, I tried to get Vanguard to convert a fixed amount of stock to a new Roth and withhold 20% of that transaction so I wouldn't have to pay estimated taxes this year. ........................

Are you under 59.5 y.o.? If so, there will be an extra 10% tax on the amount withheld for early distribution. Usually the recommendation is to pay from outside sources,if possible, to make the Roth larger and more effective.

 

[Animorph]

Recently I heard a ROTH conversion "expert" recommend that one's entire tIRA be ROTH converted, with the idea that you could then "pick and choose" what to re-characterize later. This seems pretty radical to me but interesting, never the less.

You may not want to do that early in the year. It can be nice to have some shares left to convert if the market tanks later in the year. You may not want to Roth convert if all your new accounts have lost 20%. On the other hand, you don't want to miss a 20% gain during the year by converting everything at the end of the year. So some now and some later can insure that you can convert something.

I convert way more than I expect to need at the beginning of the year. Then if anything goes way down I convert some more. At the end of the year I might convert some more if my conversions are mostly down, including some cash.

 

[pb4uski]

I guess these strategies about converting more than you need and cherry-picking and recharacterizing the losers is more complicated than what I care to do and a game I'm not interested in playing. My concern would be that I lose track or mess up somewhere or something happens to me or in my life that I neglect to do the recharaterizations and end up with a big tax bill at the end of the year.

 

[Animorph]

I guess these strategies about converting more than you need and cherry-picking and recharacterizing the losers is more complicated than what I care to do and a game I'm not interested in playing. My concern would be that I lose track or mess up somewhere or something happens to me or in my life that I neglect to do the recharaterizations and end up with a big tax bill at the end of the year.

It is one of those things where you have to do the extra work for it.

You can wait until the tax deadline of the following year to decide what to recharacterize, including extensions I believe. So it's not a big gotcha, and not a big end of year tax estimation problem.

For 2014 I had Roth conversion accounts ranging from 35% gains to 13% losses in March 2015. I kept everything above 7% gain that fit within my target income and recharacterized the rest. I kept 31% of what I converted.

 

[Ed_The_Gypsy]

Are you under 59.5 y.o.? If so, there will be an extra 10% tax on the amount withheld for early distribution. Usually the recommendation is to pay from outside sources,if possible, to make the Roth larger and more effective.

I am well over 59.5.

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[Ed_The_Gypsy]

update...more concerns

OK, I have been on the phone to Vanguard today and it is almost like calling the IRS--I get seemingly different answers from different people.

You probably want to recharacterize into a new tIRA account. After you recharacterize you cannot Roth convert those assets again until the end of 2015 or for 30 days, whichever is longer. You probably don't want to mingle recharacterized assets with Roth conversion eligible assets in one account.

Animorph, the first specialist told me that I could NOT create a new traditional IRA to send the Roth contents back to. She said that it had to go back to the same account it came from. Later a second specialist told me that was not true; I can create a new one if I want. The "IRA Recharacterization Form", Form RCAF, seems to agree with that.

However, the second specialist threw me a curve ball. On page 3 of 5 of Form RCAF, there is a section at the bottom, "Additional holding for remaining recharacterization amount required", which baffled me (still does!). His explanation stunned me and I am hoping someone here can straighten me out.

He tells me that the IRS considers all of my Roths (I have three) to be one big Roth. If I want to recharacterize Roth 2 and Roth 3 because they lost value (why else?), the gain or loss of Roth 1 must also be included, using a percentage. (WHAT) Establishing separate Roths is only for 'my accounting purposes' and makes no difference to the IRS. (What does that mean?) It sounds like if Roth 1 had large gains (counting from the day of the conversion to Roths 2 & 3), it could negate the losses in Roths 2 & 3.

I am going to go back to Vanguard and find a senior specialist who has been there a few years (this specialist sounded like he had not started to shave yet) and ask again, but I would be most grateful if someone here who has actually done this (Animorph?) could illuminate me.

Thanks,

Ed

 

[Ed_The_Gypsy]

further update

OK, finally got an understandable answer from Vanguard. Simple answer: use only one form RCAF for each Roth in my case and the confusion disappeared. (One stock, one Roth.)

The old rule applies: If you don't get an answer you understand, keep asking.

Got confirmation that, if I want to make a replacement conversion, do it BEFORE I do the recharacterization, because I will have to wait until next year if I don't. (Actually, I think I can do it after recharacterization, but that is another problem and this keeps it simple.)

I will report back if there are further developments.

Ed

 

[Animorph]

Sorry, I only check in irregularly.

I've been doing the multiple Roth account conversions for two years now, with Fidelity. This year I was able to do everything online, though apparently it is executed manually since it took them a few days. I recharacterized 12 accounts this time IIRC. Fidelity did all the calculations, including one partial recharacterization. All went as expected. Accounts that were 100% recharacterized went 100% to the target tIRA. The expected proportion of the partial recharacterized Roth account went back to the tIRA. Nothing else was touched, with I think six Roth accounts retained.