Roth IRA Unconversions and Reconversions. - Posted by William L. Exeter


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Posted by William L. Exeter on October 27, 1998 at 12:04:01:

IRS Issues Notice 98-50 on October 20, 1998 regarding the Roth Conversion IRA “unconversions” and subsequent “reconversion”.

The Internal Revenue Service issued Notice 98-50 on October 20, 1998, that created interim regulations which address the number of times a taxpayer can “unconvert” a Roth Conversion IRA back to a Traditional IRA and “reconvert” again to a Roth Conversion IRA for the 1998 and 1999 tax years.

This is good news for taxpayers that converted from a Traditional IRA to a Roth Conversion IRA prior to the recent stock market correction (i.e.: prior to August 1998). They can now “unconvert” their Roth Conversion IRA to a Traditional IRA at pre-correction market values and then “reconvert” to a Roth Conversion IRA again at post correction market values resulting in potentially significant tax savings.

This is an issue that has created substantial confusion among taxpayers and financial institutions in recent months. The Internal Revenue Code (IRC) did not include any provisions that would allowed taxpayers to “unconvert” and subsequently “reconvert” due to the serious stock market volatility and downturn. Financial Institutions across the country have developed numerous, and often conflicting and frustrating, policies to address their clients’ requests to “unconvert” and subsequently “reconvert” due to the substantial decrease in the value of their IRA portfolios.

New Conversion Limits

IRS Notice 98-50 allows taxpayers to “unconvert” their Roth Conversion IRA back to a Traditional IRA and subsequently “reconvert” again to a Roth Conversion IRA one time between November 1, 1998 and December 31, 1998. The deadline for taxpayers to complete their 1998 “unconversions” and subsequent “reconversions” is still April 15, 1999, including extensions. The IRS Notice also allows taxpayers to “unconvert” their Roth Conversion IRA back to a Traditional IRA and subsequently “reconvert” again to a Roth Conversion IRA one time during 1999, although 1999 conversions are not eligible to be taxed over a four-year period.

None of the conversions, unconversions and reconversions completed prior to November 1, 1998 will be affected or invalidated by this Notice 98-50. If a taxpayer completes a second Roth Conversion IRA “reconstruction” during the November 1 through December 31, 1998 period or during 1999, the second conversion will not be subject to any penalties, but instead would be classified as an excess reconversion and for tax purposes the taxpayer will pay taxes on the first “reconstruction”.

You may wish to evaluate your own Roth IRA Conversion situation and determine if this new Notice would benefit you.

Bill Exeter
Security Trust Company.