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October 6, 2011

Recharacterizations can be done in-kind

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Important: The Tax Cuts and Jobs Act of 2017 repealed the option to recharacterize Roth conversions, for Roth conversions done after 2017.  As such, only regular contributions to traditional IRAs and Roth IRAs may now be recharacterized.When recharacterizing a Roth conversion or contribution, it is not necessary to liquidate non-cash assets. Instead, the assets (stocks, bonds, etc.) can be recharacterized in kind. This is important for clients who want to keep the assets in which the conversion amount is invested.

Recharacterizations in kind

For instance, assume an individual converted $100,000 in cash to his Roth IRA last year, and has since invested the amount in stocks and bonds, for which the current market value is as follows:

Stock A- $25,000

Stock B-$20,000

Stock C-$30,000

Stock D-$10,000

Cash-              $25,000

Total$110,000

He would recharacterize the entire amount of each asset and cash to recharacterize the entire conversion.

Important: If he is recharacterizing less than the entire conversion, or if the Roth IRA had other sources of funding such as contributions or another conversion, he would need to calculate the net income attributable (NIA) to the conversion amount that we wants to recharacterize, in order to determine the current market value of the conversion. This is necessary, because the NIA is based on the performance of all the assets held in the Roth IRA during the computation period. The NIA is not based only on the assets in which the $100,000 was invested. Using the example above, assume that this individual had other assets in the Roth IRA for which there was significant market losses; the actual NIA on the $100,000 may then be less than $10,000.

Failing to compute the NIA when required can result in the actual recharacterized amount being less or more than intended.

Tip provided by Denise Appleby

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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