Phil Marti wrote:

- quote -

No, you have to deal with total *conversion* for the given tax year (the
"computation period", which is from the date of conversion to the date
of recharacterization). The fact that you may have other Roth amounts
from prior year contributions or conversions is irrelevant.


- quote -

The OP is a tax preparer who has been a regular participant in this
group longer than me, so I trust he will speak for himself if he is
confused.

There is a very good article on this topic, which I first came across by
reference in this very newsgroup, at the following link:

http://www.ataxplan.com/bulletinBoar...onversions.cfm

(Bob Keebler and Stephen Bigge, published in the May-June 2007 issue of
the CCH Journal of Retirement Planning, "To Convert or Not to Convert:
That is the Question.")

In particular, this article explains the anti-cherry picking rules which
state that if you convert two securities in the same transaction, you
can't chose to only re-characterize one of them, you have to pro-rate --
unless you kept each conversion segregated.

I do not expect you will ever get 1099-R documents that auto-magically
give you the result you want -- you will have to include a statement, or
a Form 8275 disclosure, with the return. Typically, you will get a
1099-R that shows the original taxable conversion (distribution from
Traditional IRA). Then, if you recharacterize in time, you will get
another 1099-R with a box 7 code of either N or R, which shows a
distribution in box 1 and hopefully, a taxable amount of zero in box 2a.
In this second 1099-R, the amount in box 1 will be the amount
*transferred* in the recharacterization, which the custodian is supposed
to calculate as the total amount converted plus gain or loss since
conversion. (As I previously stated, sometimes they still get this
wrong, even to the point of not following their own written advice at
the time of conversion).

The amount transferred is not the same as the amount recharacterized.
You should include a statement or disclosure of some kind indicating the
original amount converted, and the amount transferred in the
recharacterization, and that no other contributions or distributions
were made during the computation period.

In the OP's case, I don't see why the dividends should be treated any
differently from any other gain or loss on the converted amount.

Here is an example from TD 9065 of the type of calculation you will need:

"(6) The following examples illustrate the net income calculation under
section 408A(d)(6) and this paragraph:

"Example 1. (i) On March 1, 2004, when her Roth IRA is worth $80,000,
Taxpayer A makes a $160,000 conversion contribution to the Roth IRA.
Subsequently, Taxpayer A discovers that she was ineligible to make a
Roth conversion contribution in 2004 and so she requests that the
$160,000 be recharacterized to a traditional IRA pursuant to section
408A(d)(6). Pursuant to this request, on March 1, 2005, when the IRA is
worth $225,000, the Roth IRA trustee transfers to a traditional IRA the
$160,000 plus allocable net income.

- quote -


"(ii) The adjusted opening balance is $240,000 [$80,000 + $160,000] and
the adjusted closing balance is $225,000. Thus the net income allocable
to the $160,000 is -$10,000
[$160,000 x ($225,000 - $240,000) / $240,000]. Therefore, in order to
recharacterize the March 1, 2004, $160,000 conversion contribution on
March 1, 2005, the Roth IRA trustee must transfer from Taxpayer A's Roth
IRA to her traditional IRA $150,000 [$160,000 - $10,000]."

If you want to take advantage of the Oct 15 2009 date to recharacterize
2008 conversions, you have to write "filed pursuant to section blah
blah" stuff at the top of the amended Form 1040. (per pub 590).

-Mark Bole

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

In misc.taxes.moderated, Phil Marti wrote:

- quote -

It's helpful to know for those of us who want to consider converting
an IRA to a Roth in the future.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Mark Bole" wrote:

- quote -

Which OP has already said wasn't the case. Please, he's confused enough
without turning this into a discussion of all the possible tidbits of
recharacterization.

--
Phil Marti
Clarksburg, MD

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Phil Marti wrote:
- quote -

Unless they were segregated during both the original conversion and the
recharacterization. From Notice 2000-39:

"Also as under the old method, if an IRA is established with a
contribution and no other contributions or distributions are made to or
from that IRA, then the subsequent recharacterization transfer of the
entire account balance of the IRA pursuant to § 408A(d)(6) will satisfy
the requirement of that Code section that the transfer be accompanied by
any net income allocable to the contribution."



- quote -

There are a few conditions to be met to get this deadline, be sure to
see Pub 590 for details. Not only do you have to "fix it", but then
most likely you have to file an amended return (since one of the
conditions is that you timely filed an original return).

- quote -

In my experience, even the well-known, large, experienced firms get this
wrong. What you get in writing at the time of recharacterization
transaction, and what you get on the 1099-R you receive shortly after
the end of the year, can vary significantly and without explanation.

-Mark Bole

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Phil Marti wrote:
- quote -

give an example on how a recharacterization is computed using
Treasury Regulations.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Bill" wrote:

- quote -

As you now know, you can't look at individual assets in a
recharacterization. You have to deal with total account value, as explained
in Pub 590. The effect of what has gone on so far is that you have
recharacterized only a portion of the conversion. You're going to have to
move more assets out of the Roth into the traditional if you want to wipe
out the conversion income completely.

The good news is that you have until October 15, 2009 to fix it. The bad
news is that the first recharacterization and what appears to be a second
conversion (of the dividend) greatly complicated the matter.

My advice would be to call the custodian and see if they have IRA
specialists you can work with. The agent you spoke to before didn't know
what (s)he was doing.

--
Phil Marti
Clarksburg, MD

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

prm20871[at]verizon.net (Phil*Marti) posted:

- quote -

Roth was originally established via conversion when that first became
available -- about 10 years ago. No subsequent contributions nor
rollovers, until the 1000 Sh of WAMU in 2008.
Value at end of 2007 was about $35,000. Value at end of 2008 is about
$33,000.

While WAMU shares were "alive" 1 cent/share dividend was issued ($10),
and trustee has apparently incorporated that with WAMUQ value at time of
recharacterization for a separate 1099R Box 7 Code N, totalling $34 --
presumably based on the $10 + 2.4 cents per share of WAMUQ bid at time
of recharacterization (guessing!).

Bill

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Bill" wrote:

- quote -

I assume he never noticed that everything the trustee prints says "Don't
rely on us for tax advice."

- quote -

Yes. There's no theory about it. That's the law.

I'm snipping all the irrelevant Who shot John? about what everyone thought.
What's important now in determining how to fix things, if necessary, is what
was the history of the Roth. If the Roth was established solely to receive
the conversion, there's no problem. If there was other stuff in there, more
work is needed in order to wipe out the now phantom income from the
conversion.

Please advise.
-
Phil Marti
Clarksburg, MD

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

In mid 2008, TP elected to rollover 1000 Sh of WAMU from Trad IRA to
Roth IRA (both held by same trustee), in expectation decrease in WAMU
value would lower taxable distribution.

As it happened, WAMU collapsed within 3 months. So in September 2008,
since it had been a transfer of stock shares by the same trustee, TP
inquired of broker/trustee if those same shares could be recharacterized
-- and thus negate the original transfer (and consequent taxable
distribution).

Trustee agreed since the stock had not been traded/monetized, that such
a recharacterization would negate the effect of the original rollover,
and since the actual shares of stock were transferred, it would have the
desired effect.

Now, 1099R is issued showing the original distribution based on the
"theoretical value" of those shares at time of rollover and therefore
erasing the effect of the recharacterization -- under the theory that it
was the "value of the shares" which was transferred, rather than the
_actual shares_, and the "recharacterization" thus became meaningless,
since those shares were without value at the time of recharacterization.

Is this correct? Broker's opinion at the time was in agreement with TP
-- that the 1000 Sh of WAMU were the conversion, and thus it was those
same 1000 Sh which were recharacterized.

Pub 590 discusses a negative recharacterization in the event a loss has
been experienced, but it is not dealing with the same specific shares of
a particular stock.

Please provide cite which might persuade the trustee to issue a
"corrected 1099R" without the "theoretical value" of those shares
included as a distribution, since the same shares were
"recharacterized."

Bill

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >