Undo a Roth Conversion?

[Snaggletooth]

Can a taxpayer "undo" a conversion from a Traditional to a Roth prior to April 15th?

Taxpayer was advised by some brilliant friend who did not tell them the tax effect of a large conversion...

[FEDUKE404]

Roth recharacterization

Of course! Look up "recharacterized Roth IRA contribution" and a Form 1099-R with Code "R" is needed.

You have until October 15th to repair 2016 miscue.

Paperwork can be messy for all involved.

FE

[Roland Slugg]

Snag, if your client does what FEDUKE404 suggests, keep in mind that the recharacterization must be done via a trustee-to-trustee transfer (unless both accounts are with the same trustee). The second 1099-R form, of course, will be issued by the distributing trustee in January 2018. The earnings while the funds were in the Roth IRA must also be transferred back to the traditional IRA. There is paperwork, of course, but all the big trustees will have a form to handle it easily.

If your client does do a recharacterization, he will have to report the conversion on his 2016 tax return, because he will have received a 1099-R form reporting it. I believe he can then report the reconversion as a rollover, but maybe there is another code or something for that so the amount isn't taxable on his 2016 return.

[FEDUKE404]

Paperwork for recharacterization

Snag, if your client does what FEDUKE404 suggests, keep in mind that the recharacterization must be done via a trustee-to-trustee transfer (unless both accounts are with the same trustee). The second 1099-R form, of course, will be issued by the distributing trustee in January 2018. The earnings while the funds were in the Roth IRA must also be transferred back to the traditional IRA. There is paperwork, of course, but all the big trustees will have a form to handle it easily.

If your client does do a recharacterization, he will have to report the conversion on his 2016 tax return, because he will have received a 1099-R form reporting it. I believe he can then report the reconversion as a rollover, but maybe there is another code or something for that so the amount isn't taxable on his 2016 return.

It's been several years since I had a client who just couldn't make up his mind, but your scenario sounds about right.

IIRC, the "paperwork" for him was not overly complicated, but the major brokerage firm had a small group of individuals in a midwest city who handled ALL such (re)conversions. For the tax preparer, things were a mess. I believe Form 8606 and/or Form 5329 are involved? And you are correct, there is likely (especially in an "up" market!) some "bad" earnings income that will be taxable for the year the funds first arrived in the account. I believe you also have to have information for prior year donations, end-of-year values, etc. Under the correct circumstances, you could then be looking at amended return(s) to add insult to injury.

Only glimmer of hope is you MIGHT get the Form 1099-R sooner than January of 2018. I'm not sure how that in-house process for this type of transaction works.

Yeah, it was an ordeal, to say the least. Good luck, Snag!!

FE

[Snaggletooth]

Resistance

We're getting resistance from the custodian. He claims that you can do so only if the transfer is between "qualifying" accounts, and the original 401k to a Roth are incompatible accounts. He adds that we had a 60-day window and it has passed.

He also tells my clients that we can report 50% in 2016 and 50% in 2017 even without a corrected 1099-R.

I'm suspicious that the custodian doesn't know what he's talking about. However, most of those guys know more than I do about capabilities, etc.

Does anything make sense? A 401k is not the same as an IRA for these purposes. Or so they say.

[FEDUKE404]

Answers

We're getting resistance from the custodian. He claims that you can do so only if the transfer is between "qualifying" accounts, and the original 401k to a Roth are incompatible accounts. He adds that we had a 60-day window and it has passed.

He also tells my clients that we can report 50% in 2016 and 50% in 2017 even without a corrected 1099-R.

I'm suspicious that the custodian doesn't know what he's talking about. However, most of those guys know more than I do about capabilities, etc.

Does anything make sense? A 401k is not the same as an IRA for these purposes. Or so they say.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-recharacterization-of-roth-rollovers-and-conversions

[Burke]

We're getting resistance from the custodian. He claims that you can do so only if the transfer is between "qualifying" accounts, and the original 401k to a Roth are incompatible accounts. He adds that we had a 60-day window and it has passed.
He also tells my clients that we can report 50% in 2016 and 50% in 2017 even without a corrected 1099-R.
I'm suspicious that the custodian doesn't know what he's talking about. However, most of those guys know more than I do about capabilities, etc.

You are right. He doesn't know what he is talking about and I would bring it to his (or his superior's) attention. See post above with link to IRS topic. Also the 50% in one year and 50% in another year? Only in 2010 when it was a special option, one-time thing. If I recall correctly, conversions in 2010 could be reported in 2011 & 2012.