Understanding the Limitations of Re-Converting Your IRA

Okay, so we’ve covered Roth Conversions – where you distribute the funds from your traditional IRA to a Roth IRA.  Then we covered Recharacterizations – where you can “undo” the conversion by moving all or part of the converted funds and the earnings associated with it back into a traditional IRA.  The end result is that, for those funds converted and recharacterized, from the eyes of the IRS, nothing happened to the account (except that you may have put the money back into a different IRA).

So, if you went through a Roth Conversion and then Recharacterized it, the assumption is that you wish to eventually re-convert those funds to a Roth account.  When are you allowed to do this?

The Limits on Re-Converting an IRA

There are two limits on the Re-Conversion of funds to a Roth account once they’ve been through the Conversion/Recharacterization wringer:

  1. This first limit is that you cannot convert the same funds to Roth IRA twice in the same calendar year.  This means that if you converted your account over to Roth in July of 2010 and recharacterized those same funds back into a traditional IRA in October of 2010, you cannot reconvert the funds again in calendar year 2010.  You must wait until at least January of 2011 to re-convert.
  2. The second limit is that you cannot re-convert funds that have been recharacterized within the previous 30 days.  From the example in #1 above, clearly this isn’t a problem since you already have to wait until the next calendar year from the recharacterization, which is more than 30 days away.  If instead you recharacterized that original conversion in January of 2011, you have met the calendar year requirement – but now you have to wait for at least 30 days after the recharacterization before you can re-convert the funds.

It is important to note that all of this conversion/recharacterization/re-conversion is specific to the funds (that is, the account) that you have converted.  If you have multiple IRA accounts you could conceivably have converted and recharacterized funds from one account within a few months (in the same calendar year), and then do another conversion of funds from one of your other accounts without the two limits above having an impact.


IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

An IRA Owner's Manual
A Social Security Owner's Manual

4 Comments

Leave a comment
  • Tom,

    You should be able to convert your IRA to Roth and it would have no impact on your wife’s recharacterization. Since the “I” in IRA stands for Individual, neither account’s activities impacts or limits the other.

    jb

  • My wife and I file a joint return. Earlier in 2011 my wife converted a portion of her traditional IRA to her Roth. With the market downturn, we now wish to re-characterize this conversion. The problem is we don’t want to wait until 2012 to reconvert, as we don’t know what the market values will be then nor what (if any) tax rate increases will be implented next year. In order to take advantage of the relatively low stock market values now, can I convert a portion of my traditional IRA to my Roth instead? We would “undo” her conversion and do one with my IRA instead for roughly the same amount. We want to keep the overall converted amount (hers or mine) below a specific threshold for tax rate and medicare rate purposes.

    Thanks……………..Tom

  • Greg,

    If I’m following you correctly, you have money that was placed in a traditional IRA (non-deductible) in 2010, then converted to Roth. Now you want to recharacterize the conversion back to the trad IRA and then recharacterize the contribution to the trad as a Roth contribution.

    It sounds like a plausible move, I don’t know why you couldn’t do this.

    So, the amount to be recharacterized in both cases would be the amount contributed in January 2010 plus all growth that occurred on that amount through the present. Tax will be owed on the growth amounts – but penalty should not apply.

    jb

  • I have a non-deductible 2010 Traditional IRA contribution made in Jan 2010 that was ‘converted’ to a Roth in July 2010. I have subsequently completed my 2010 Taxes (drafted/unfiled) and have now realized that I am eligible (under MAGI limits) for a Roth contribution.

    I am now trying to work w/the IRA custodian on how to handle my intention which are to recharacterize the 2010 contribution from Traditional to Roth, thereby reducing my Form 8606 ‘conversion’ total dollar amount for 2010 (which will still include other taxable ‘conversion’ dollars. Since the funds were ‘converted’ in July, they now reside in a Roth IRA(note: this conversion is inclusive of 2009 Traditional funds which are ineligible for Roth re-characterization.

    Can I complete a recharacterization to nulify the conversion in July, and then a 2nd recharacterization of the 2010 contribution from Traditional to Roth?

    If so, what amount to I cite for recharacterization the conversion, the principal plus interest from Jan to July? What about the July – present interest dollars within the Roth that the the funds were set from the conversion transaction? how do they get back to the Traditional account? thanks Greg

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright 2014 FiGuide.com   About Us   Contact Us   Our Advisors       Login