Roth Conversion - affecting other credits

[ERD50]

Here's my plight. I thought I did a good job of planning and in Nov, 2005 converted just enough of my Trad IRA to a Roth to hit the top of the 15% bracket ($36,000 conversion) for tax year 2005.

Now, I'm doing my real taxes, using TurboTax and found I can take a credit for my son's college tuition. The catch is that I hit some income limits so the credit is reduced from a max of $2000 down to $752 (I'm giving up $1248 in credits). If I reduce my Roth conversion (I guess I need to do a recharacterization?) by $12,600, I can get the full $2000 credit. I don't think it makes sense to take the hit on the credit in addition to the ~15% tax hit on the Roth conversion.


I've researched it some (but you people provide answers I understand!), and here are my questions:

A) Can I re-characterize for this reason? I see examples for rechar because you *cannot* do it (>$100K income), but not because you do not *want to*.

B) If I understand, I can do this in 2006 for 2005 (before 4/17/06), but I probably won't get a form from Fidelity before then. So I do the paperwork with them and just fill out the numbers on a 1099-R in TurboTax?

TIA for any help, the government sure does not make this easy for us with all the iterative tax implications (arghhhh!) - ERD50

 

[ERD50]

I found part of my answer at Fidelity:


Recharacterization

Recharacterization lets you change your mind about the type of IRA to which you make your annual contribution. You can also recharacterize assets converted to a Roth IRA back to a Traditional IRA. You can recharacterize for any reason, not just due to an error or ineligibility.

-ERD50

 

[Nords]

B) If I understand, I can do this in 2006 for 2005 (before 4/17/06), but I probably won't get a form from Fidelity before then.

Phew, it's hard to believe (but possible) that the IRS would give us an extra three months to do this.

You might want to check the deadline, and the entire recharacterization process, in IRS Pub 590. We've applied logic to these situations before and found out that we would have been in trouble.

 

[ERD50]

Phew, it's hard to believe (but possible) that the IRS would give us an extra three months to do this.

Thanks, between pub590 and TTax I think I got through all the lingo, and TTax seemed to take it OK.

Yes, you do have until the file date (at least, maybe even extension date, but that was not clear) to re-characterize any conversion (or contribution for that matter). The logic behind it is (uh-oh - here comes 'logic' and 'taxes' in the same paragraph) that you could do a conversion or contribution anytime in the year, then earn more money than expected late in the year. That could push you past the limits. So they allow you to back it out. According to Fidelity, you don't need a reason to back it out.

But I need to triple check all this. Once you 'unconvert' you can't 'reconvert' until next year. I've got to get it right this time, and I need to get the xfer done at Fidelity in time to file. Fun,fun,fun.

-ERD50

 

[Martha]

FWIW, you only have until the initial file date, you can't use an extension to convert later.

Publication 590 is one of my favorites. Worth a bookmark.