IRA recharacterization -> Traditional to Roth same rules as Roth to Traditional?

IRA recharacterization -> Traditional to Roth same rules as Roth to Traditional?
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#1

Background of the question: Trying to help a family member they want to rollover and convert to Roth by end of year. Fidelity said to rollover to a rollover traditional first rather than straight to Roth. I’m not sure why Fidelity told me so strongly NOT to rollover directly to Roth… Timing is getting tight now (current custodian said “up to 2 weeks”), relative has finally decided to go through with conversion. Hopefully tomorrow… Only so much nudging one can do :slight_smile:. Their 401k administrator only allows rollovers by phone and only during weekday business hours.

I have seen that if you do a conversion or rollover, the withdrawal date determines the tax year and not the date it’s received in the new account. If the custodian withdraws but drag feet and it doesn’t get to the IRA in time, then it possibly wouldn’t get converted to roth by Dec 31. So, I am wondering if that happens if the rollover can be recharacterized to Roth, because that is allowed through Oct 15.

Meat of the question:
I can only find reference on IRS site for 401k Rollover Roth -> Traditional recharacterization (such as here: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-recharacterization-of-roth-rollovers-and-conversions), and nothing about recharacterizing a 401k Rollover traditional TO roth, or even about recharacterizing a regular contribution to a traditional IRA into a Roth IRA.

I have found other references from google that you can also re characterize from Roth to Traditional, but nothing about rollovers specifically. Example is here: https://www.investopedia.com/terms/r/recharacterization.asp?lgl=rira-related-content-baseline

Can you recharacterize from traditional TO roth as easily as from Roth TO traditional? It seems like it should be easier, because all of it’s taxed rather than treating the gains and contributions differently when going the other way.


#2

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#3

I’m confused by what the actual question is. You can recharacterize both traditional IRA and Roth IRA contributions.

If your goal is to get traditional 401k funds into a Roth IRA, I’m not sure where a recharacterization comes into play. A recharacterization is basically a re-do (i.e. I made a “mistake” and didn’t want to engage in that transaction).


#4

Imagine scenario:
401k custodian starts withdrawal for direct rollover Dec 12. This is 2017 tax year for tax purposes since its set by withdrawal.
401k custodian drags feet and takes 20 days and funds arrive in rollover ira (traditional) on Jan 1. This is still a 2017 rollover. But if you then convert to Roth at new custodian, that’s 2018 unless you can do this as a recharacterization for 2017. Recharacterization would make the roth conversion count for 2017 rather than 2018.

Swap the above to rolling directly into a Roth ira and I know you can definitely recharacterize the rollover to traditional for 2017 through Oct extension deadline.

I think I’m leaning to suggest a wire withdrawal at this point and 60 day rollover deposit as this avoids any timing issues. It would entail a 20% short term loan until tax refund though, because of mandatory withholding on withdrawals.


#5

If timing is tight, use a 60 day rollover if you can. However, for 401ks, sometimes they don’t allow those or have more hurdles for you taking the money yourself instead of giving you or mailing a check made out to the next custodian, which then has to be delivered. Generally speaking, definitely leave extra time for any 401k moves.

Also, be aware that you can’t definitely recharacterize a direct-to-Roth rollover that arrives late in 2018 if the tax bill passes as written before then, as it removes the ability to recharacterize tIRA->Roth conversions for next year,


#6

He’s planning to do the rollover tonight and they told him up to 2 weeks (custodian is hewitt/alight). But I don’t think that’s a guaranteed 2weeks though so am not sure the best recommendation. I’ve been prodding him for a couple weeks now to get it done.

I was thinking with wire or check to self, it wouldn’t need to be “done” and check received by end of year, just the withdrawal “made” by then.


#7

I’m not sure exactly about the finer points of this, but in practice you could put in a withdrawal request for a check to yourself and front the money as a rollover contribution to the next custodian. As you say, the withdrawal will be coded for when they cut the check.


#8

Ok, now I understand. Not sure about the answer though.

As far as I know, there’s no reason a traditional 401k could not be converted to a Roth IRA. Honestly, if a custodian was forcing me not to do that with the knowledge that not doing that directly may result in undesirable consequences, I’d find another custodian, but I understand Fidelity is large and they may have other assets with Fidelity already.

Another option could be to move it to one custodian who doesn’t have issues putting it directly into a Roth IRA (and won’t charge a transfer out/closure fee) then doing a trustee-to-trustee transfer to Fidelity.


#9

I contacted them on chat again and they said not all 401k providers support it. Called it over-the-air conversion, I think… Relative kind of indecisive. I’ve presented the opinion to withdraw and 60 day rollover (out of available options) but the relative is indecisive and I’m stopping prodding. They don’t have other assets at fidelity. Basically they have $XXk in their 401k, and nearly the same $XXk in credit card bills, but mostly on longer term fixed rate 0% (1-2years). But they were no job for over a year (with no UI either) and have income now.

I called the 401k custodian myself during work today and they said 7-10 bus days for a rollover even if it was internal to the same custodian they would still send a check through the mail and take time to “process.” But a withdrawal via ACH would be 3-5 days.