- Traditional IRAs
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Tutorial: Roth IRA Reconversions
A reconversion is a conversion of IRA funds that were converted, recharacterized and converted (again). If an amount is reconverted, the IRA owner is taxed on the value at the time the reconversion occurs, and not on the value of the original conversion.
John converted his traditional IRA to his Roth IRA. At the time of the conversion, the account was valued at $100,000. Due to poor performance of the investments, the value fell to $60,000. John realized that if the conversion remained, he would be paying a tax bill on $100,000 (the value at the time the conversion occurred), which was now worth only $60,000. To prevent that from occurring, John recharacterized the conversion to his traditional IRA, and decided that he would reconvert the amount to his Roth IRA- so as to be taxed on the lower value.
Time Limit on Reconversions
Reconversions cannot occur before the later of:
o The beginning of the tax year following the tax year in which the amount was first converted to a Roth IRA or,
o The end of the 30-day period beginning on the day on which the recharacterization occurs
Let’s look at some examples:
Assume that John, in the example above, converted his traditional IRA to his Roth IRA in July of last year. He subsequently recharacterized the amount to his traditional IRA on November 30 of last year. The amount cannot be reconverted until January 1 of this year. This is later than 30-days after the recharacterization was completed.
Assume that John converted his traditional IRA to his Roth IRA in July of last year. He subsequently recharacterized the amount to his traditional IRA on December 15 of last year. The amount cannot be reconverted until January 14 of this year. January 14 of this year, is later than January 1
If the recharacterization was done on December 3 of last year or after (including anytime this year), the amount could not be reconverted until 30-days after the recharacterization was completed, as that would be later than January 1 of this year.
Effects of Reconverting Too Early
If a reconversion is done before it is permitted, it is treated as a failed conversion. Technically, a failed conversion is subject to the same tax treatment as a regular distribution from the traditional IRA and a contribution to the Roth IRA. For instance, if John, in the example above, reconverted the $60,000 before it was permitted, it would be treated as a $60,000 distribution from his traditional IRA and a $60,000 contribution to his Roth IRA. The distribution would be subject to income tax and the 10% early distribution penalty unless an exception applies. The contribution to the Roth IRA would create an IRA excess contribution, as the maximum amount that can be contributed for the year is much less than $60,000. See Tutorial: Roth IRA Contributions for information about Roth IRA excess contributions.
A failed conversion that occurs as a result of reconverting too early can be corrected by recharacterizing the amount to a Roth IRA. A failed conversion is not counted as a conversion for purposes of determining when an amount can be reconverted.