A question to the floor about Roth recharacterizations

[Ed_The_Gypsy]

I am trying to move as much as I can from my traditional IRA into a Roth or Roths before I turn 70.5 due to the Tax Torpedo.
In February, I moved my holdings of two energy stocks worth about $38k and $28k at the time into separate new Vanguard Roths (call them Roth A and Roth B) by the back door. They have dropped a lot more than I expected, about $9,000 altogether, but I think they have bottomed out. I figure I should recharacterize soon, but I do not understand the rules well enough and the Vanguard rep only confused me.
What I have in mind is to
1) Create another two new Roths again (call them Roth C and Roth D).
2) Put (say) $38k cash into Roth C and $28k cash into Roth D from my trad IRA by the back door again. I have the cash in the trad IRA.
3) Immediately buy those two stocks again in the new Roths.
4) Afterwards, recharacterize the original two Roths, Roth A and Roth B, returning those original two stocks back into my trad IRA.
5) Sell the two stocks now back in my trad IRA.
I should mention that even though the values have dropped, the number of shares of both have increased in the meantime as dividends were reinvested.
Does this idea make sense? Is it allowed?
Thanks,
Ed

[Texas Proud]

You got me...

I think the problem will be that you converted a tIRA to a ROTH IRA and now want to convert it back to a tIRA because you lost money....

From what I am reading, you are doing two things to 'correct' the situation...

First, you are going to convert your first transfers back into rIRA accounts... that should not be a problem... just ask them to recharacterize those accounts back to what they were... they should move the shares back, including any dividends/cap gains....


Now, you still want to move some money into a ROTH IRA from your tIRA account... that is the real question.... can you do all that moving I do not know...

[pb4uski]

I don't think what you are planning makes sense.

I don't understand your "backdoor" reference. Backdoor relates to contributions by taxpayers who are not eligible to contribute due to their income, not conversions from a traditional IRA to a Roth IRA. Did you do these conversions in 2014?

While you won't know how much you can convert and stay within your desired tax bracket until late 2015, that amount won't be any different if you do what you are thinking of doing. Either way you'll have $66k of conversions and you'll still have the $9k economic loss, its just that the $9k loss will be in your traditional IRA rather than in your Roth IRA. While one could argue that the $9k economic loss is worth a bit more in your traditional IRA then in your Roth IRA given the relatively small benefit I don't see it worth doing since you won't really realize the benefit until the last $9k that you take don't take out of your traditional IRA, which I presume is many years away.

[karluk]

I am also confused by your "back door" references, since back door Roth IRA contributions don't have anything to do with what you are proposing. However, I have read many references over the years to your recharacterization proposal, and as I understand it you are in perfect position to save on taxes and/or convert a larger proportion of your tIRA to a Roth.

The following Fidelity article describe the basic strategy. Using your numbers, you have converted a total of $66k from traditional to Roth in TY 2015. Your investments are now worth $9k less, so if you recharactize now, wait the required 30 days and then convert again, you could get your energy stocks back into a Roth IRA. The advantage to you is that the Roth conversion amount (ignoring price fluctuations during the 30 day waiting period) would be only on $57k worth of shares. Your AGI for TY 2015 would be $9k less than if you hadn't gone through the recharacterization/reconversion process.

https://www.fidelity.com/viewpoints/...oth-conversion

I think what you are proposing also makes sense. You wouldn't be saving anything on your TY 2015 taxes, but you would be reducing the size of your tIRA by $9k. That would lead to long term benefits of lower RMDs and a smaller "tax torpedo" that might very well be worth more than the immediate tax savings for TY 2015.

[pb4uski]

Quote:

Originally Posted by karluk .....Your AGI for TY 2015 would be $9k less than if you hadn't gone through the recharacterization/reconversion process. I think what you are proposing also makes sense. You wouldn't be saving anything on your TY 2015 taxes, but you would be reducing the size of your tIRA by $9k. That would lead to long term benefits of lower RMDs and a smaller "tax torpedo" that might very well be worth more than the immediate tax savings for TY 2015.

How can you say that his AGI would be $9k less and in the next paragraph that he won't be saving anything on his 2015 taxes?

If the OP is converting to the top of the 15% (or 25%) tax bracket then I think his plan has no impact on his 2015 AGI or taxes because his conversion will be determined by the top of the tax bracket and his other income and not the amount of his Roth conversion.

I concede the $9k reduction in the tIRA has RMD/tax benefits far down the road, but I don;t see those benefits as hugely compelling. I guess if it is a slow day for the OP then perhaps why not.

I note that the tax savings cited in the link would not apply to the OP because his recharacterization would be followed by another conversion equal to the original conversions amount.

[karluk]

Quote:

Originally Posted by pb4uski How can you say that his AGI would be $9k less and in the next paragraph that he won't be saving anything on his 2015 taxes?

The difference is that the two paragraphs are talking about two different strategies. The first paragraph is discussing the best method of getting OP's energy stocks, and ONLY OP's energy stocks, into a Roth IRA while minimizing the tax consequences of the conversion. As things stand today, OP has $57k worth of energy stocks in Roth IRAs but has incurred a $66k increase in his TY 2015 AGI in getting the energy stocks into the Roth. The first paragraph is pointing out that the recharacterization/reconversion strategy will allow him to get the same $57k worth of energy stocks into Roths with only a $57k increase in his TY 2015 AGI. That's where the $9k in tax savings comes from.

In the second paragraph I address OP's specific proposal, which envisions making a net total of $66k in Roth conversions. This is a different strategy which doesn't lower OP's 2015 AGI at all. However, it has the advantage of getting both the $57k in energy stocks and an additional $9k in tIRA money into Roths. That's the proposal that lowers RMDs and tax liability in the future.

I concluded with a general observation that both options have merit and (without attempting any supporting calculations) that OP's strategy of reducing RMDs may be even more advantageous than minimizing TY 2015 taxes.

Quote:

Originally Posted by pb4uski If the OP is converting to the top of the 15% (or 25%) tax bracket then I think his plan has no impact on his 2015 AGI or taxes because his conversion will be determined by the top of the tax bracket and his other income and not the amount of his Roth conversion.

That's correct. Somehow OP came up with a $66k Roth conversion amount in February. If he sticks with this net amount, his TY 2015 taxes will be identical regardless of whether he recharacterizes or not.

Quote:

Originally Posted by pb4uski I concede the $9k reduction in the tIRA has RMD/tax benefits far down the road, but I don;t see those benefits as hugely compelling. I guess if it is a slow day for the OP then perhaps why not.

I disagree. OP gets a clear advantage by recharacterizing and reconverting. His choices are to either reduce TY 2015 AGI by $9k or reduce future RMDs and total future tax liability (or some combination of the two). I find the chance to reduce TY 2015 AGI by $9k to be EXTREMELY compelling and am willing to concede that OP's strategy of foregoing immediate tax savings in favor of lower RMDs may be even better. To dismiss this option as being somehow clearly inferior to an immediate reduction in TY 2015 taxes without doing any sort of supporting calculations is, at best, rather careless reasoning.

[LOL!]

There are 3 links in this bogleheads thread about Roth recharacterization that you may wish to read:
Bogleheads • View topic - Which brokers do hassle-free Roth cnvrsn recharacterizations

[pb4uski]

Quote:

Originally Posted by karluk ....I disagree. OP gets a clear advantage by recharacterizing and reconverting. His choices are to either reduce TY 2015 AGI by $9k or reduce future RMDs and total future tax liability (or some combination of the two). I find the chance to reduce TY 2015 AGI by $9k to be EXTREMELY compelling and am willing to concede that OP's strategy of foregoing immediate tax savings in favor of lower RMDs may be even better. To dismiss this option as being somehow clearly inferior to an immediate reduction in TY 2015 taxes without doing any sort of supporting calculations is, at best, rather careless reasoning.

Whether the OP stands pat with the $66k of conversions he has done to date or implements his plan, either way his aggregate Roth conversions for 2015 will be $66k and his AGI will be the same.

You are creating a new scenario that was not part of the OP's post where he would recharacterize the $66k of conversions made in February and then converts the current value of those holdings of $57k and as a result reduce his AGI by $9k.

The OP says that "I am trying to move as much as I can from my traditional IRA into a Roth or Roths before I turn 70.5 due to the Tax Torpedo." which suggests that he would not be willing to forgo the chance to convert $66k in favor of converting $9k. If his objective was to save current taxes then he wouldn't do any conversions at all.

[MichaelB]

Yes, we can disagree without being disagreeable. Lets take a step back, breathe easily and wait for the OP to respond.

[sengsational]

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.

Quote:

The law allows a reconversion only after the later of 30 days and the next calendar year following the recharacterization. If you wait until Oct. 15, 2015, to recharacterize, then you can’t reconvert until January 1, 2016. But if you recharacterize on Dec. 31 2014, after first converting in 2014, then you can reconvert on January 31, 2015. The rule makes December of the year of the conversion the ideal time to recharacterize.

Expanding the Roth IRA Opportunity — Investing Daily

You might consider opening up C and D with different asset classes, pick the winner in December, and recharacterize the rest back.

[Animorph]

Ed, you're doing roughly what I have done for the last two years. The backdoor part is a mystery to me as well. Seems like a straight forward Roth conversion to me.


I try to Roth convert additional shares if my original Roth conversion loses 10% of its value, similar to your situation. Roth converting cash into new accounts and then simultaneously buying shares with that cash and selling the old shares in the first Roth conversion accounts is one way to do this if I don't have additional shares available. The AA stays identical, with no time out of the market.


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.


I wait until tax time the next year before doing any recharacterizations. You don't gain anything by doing them early in 2015 since you can't Roth convert them again until 2016. And you never know, if the market went up 50% in early 2016 maybe you'd want to convert more than you thought. But give yourself enough time for Vanguard to do the recharacterization and send you a letter with the details before you have to file your taxes.


You will be converting more shares for the same 2015 tax dollars, which should be worth the hassle of working with Vanguard and filling out the tax forms.

[karluk]

Quote:

Originally Posted by Animorph After you recharacterize you cannot Roth convert those assets again until the end of 2015 or for 30 days, whichever is longer.

This is also what the Fidelity article in my link says, but I originally misread it as the beginning of 2016 or 30 days, whichever is sooner. My mistake. Since the first recharacterization prevents additional Roth conversions until next year, Ed's strategy to make more Roth conversions before doing a recharacterization is definitely the way to go.

[karluk]

Quote:

Originally Posted by sengsational You might consider opening up C and D with different asset classes, pick the winner in December, and recharacterize the rest back.

I love this idea because it is so ingenious. It may not be original, since there are very few truly original ideas anymore, but anyone who has the willingness to open separate Roth conversion accounts totaling much more than what the taxpayer really intends to convert should come out ahead. The worst performing accounts can be recharacterized to reduce 2015 tax liability, and the winners allowed to stand. It seems to me that this is the way to maximize Roth balances and minimize tIRA balances while paying a constant amount in current taxes on the conversions.

[sengsational]

Not original!! Outdated a bit now, but I watched this youtube video the day it was released (and actually remembered the idea).

Roth Segregation Part 2: Implementation

(Can't past links on this forum site with this tablet, so you'll need to search youtube for that title)

[kaneohe]

Quote:

Originally Posted by karluk ............ Since the first recharacterization prevents additional Roth conversions until next year, ..................

It was my impression that the recharacterization prevents additional Roth conversion until next year.......but only of the assets that were recharacterized.
If there are additional assets in the TIRAs, you can converts those w/o a delay.....it might be better to convert those additional assets before the recharacterization so it is obvious that they are different assets.

[gcgang]

http://www.irs.gov/Retirement-Plans/...nd-Conversions

Here's the IRS on Roth recharacterizations.

You need to pay attention to timing, but you might as well recharacterize to reduce AGI and "take advantage" of your loss


Sent from my iPad using Early Retirement Forum

[Ed_The_Gypsy]

Sorry for slow response. I have been away.

karluk's analysis of my intent is accurate. He noted correctly that I have two different parts of the puzzle. I apologize for not making that clear in the first place.

Back-doors are not limited to people making too much to put into a Roth (although technically I probably am, even this year; I have some earned income in 2015, but with the back-door conversion, my total income will probably put me out of the upper limit for Roth contributions). Back-doors are a means to move more than the annual contribution limit into a Roth in one year. The assets must come from or through a traditional IRA, though. There may be other sources, but mine is a standard before-tax trad IRA. Back-door conversions do not require earned income and there is no upper general income limit (yet).

[Ed_The_Gypsy]

Quote:

Originally Posted by Animorph 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.

That is a great idea! Thanks! That should keep both the IRS and Vanguard happy.

[Ed_The_Gypsy]

Quote:

Quote: Originally Posted by Animorph View Post/ After you recharacterize you cannot Roth convert those assets again until the end of 2015 or for 30 days, whichever is longer./ This is also what the Fidelity article in my link says, but I originally misread it as the beginning of 2016 or 30 days, whichever is sooner. My mistake. Since the first recharacterization prevents additional Roth conversions until next year, Ed's strategy to make more Roth conversions before doing a recharacterization is definitely the way to go.

My confusion is about additional or subsequent conversions to Roths. Am I forbidden to make ANY more conversions before next year, or just converting the same asset/specific stock?

[Ed_The_Gypsy]

Don't try to get too fancy on these conversions.

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. Bad idea. Such requests go into a particular in-basket and sit there until they have time to execute them. Starting in January, tax season and a lot of account juggling happens and my request was bottom priority. After 3 weeks, I called to find out what the status was and was told it might be another 3 weeks before they could act on it. They couldn't take the 20% I wanted to use as withholding from my MMF, either, which would have saved me from having to make estimated tax payments this year.

I cancelled that conversion and just asked them to convert a fixed amount of stock, period, without withholding. It happened the next day. Now I have to pay estimated tax quarterly, complicating my life.