few provisions under the tax code that allow you to change your mind
about a transaction and have it reversed. One of these is a
recharacterization between a traditional IRA and a Roth IRA which
allows a taxpayer to reverse a Roth IRA conversion or change the
‘flavor’ of an IRA contribution. Under this provision, individuals who
convert amounts from traditional IRAs including, SEP IRAs and SIMPLE
IRAs to Roth IRAs can reverse the conversion by moving the converted
amount, plus any net income attributable (NIA), back to an IRA.
Individuals who convert amounts from qualified plans such as pension
plans, profit sharing and (401(k) plans; 403(b) plans; and 457(b) plans
can also recharacterize those amounts, along with any NIA, to a
recharacterization from a Roth IRA cannot be made to a SIMPLE IRA,
unless the conversion occurred from a SIMPLE IRA.
addition to recharacterizing Roth conversions, individuals who make IRA
contributions to one type of IRA can recharacterize the contribution,
plus any NIA, to another type of IRA. This means that an individual who
makes a contribution to a traditional IRA can recharacterize that
contribution, plus any NIA, to his Roth IRA and vice versa.
need not recharacterize an entire conversion or contribution, and can
instead do a partial recharacterization. For instance, assume an
individual converted $100,000 to a Roth IRA and realized that the tax
due on the amount is more than he can afford to pay. He can reduce the
taxes owed by recharacterizing a portion of the $100,000. The amount
recharacterized should include NIA attributed to the amount being
rechacterized and not the entire conversion. For example, if he
recharacterizes $50,000, the NIA must be based on $50,000 and not
recharacterize conversions and contributions for two reasons:
they want to: An
individual may change his mind about the conversion because (a) he no
longer wants to (or feels he can afford to) pay the income tax owed on
the conversion, (b) it puts him in a higher tax bracket than he would
have been had he not done the conversion, (c) the value of the
converted assets has gone down and the individual does not want to pay
income tax on value that no longer exists.
individual who chose to make his IRA contribution to one type of IRA
may change his mind for reasons which include (a) he wants the
deduction for the contribution and contributions to Roth IRAs are not
deductible (b) he prefers the tax-free growth of the Roth IRA to the
deduction for the traditional IRA, (c) he does not get a deduction for
the traditional IRA and therefore wants the funds in a Roth IRA.
they are required to: Individuals
must meet the following requirements in order to convert assets to a
Roth IRA; (a) their modified adjusted gross income (MAGI) must be
$100,000 or less and (b) their tax filing status must not be married
filing separately. If an individual does not satisfy these requirements
and had a Roth conversion done during that year, he must recharacterize
the conversion or run the risk of losing the tax-favored status of the
assets and owing the IRS a penalty of 6% of the amount of the
conversion for each year it remains in the Roth IRA. Note: These
limitations are repealed for tax years beginning 2010.
whose MAGI exceeds the following amounts cannot contribute to a Roth
IRA; $116,000 for those whose tax filing status is single; $169,000 for
married-filing-jointly; and $10,000 for married-filing-separately. If
an individual contributed to a Roth IRA and finds that his income
exceeds these amounts, he is required to recharacterize the
contribution to a traditional IRA, or remove the amount from the Roth
IRA as a return-of-excess contribution.
cases, individuals find out they are required to recharacterize their
conversions or Roth IRA contributions only after filing their tax
returns and realizing that their MAGI exceeds the Roth income limits.
The good news is that it is not too late (even then) to complete the
must be completed by the individual’s tax filing deadline for the year
of the conversion or contribution. Individuals who file their
tax-return by the due date receive an automatic 6-month extension to do
a recharacterization, which is up to October 15 for individuals who
file on a calendar year. For a conversion, this gives an individual up
to October 15 of the year after the conversion occurs to do a
recharacterization. For a contribution, the individual has up to
October 15 of the year after the year for which the contribution is
made to recharacterize the contribution.
recharacterization is considered complete only if it includes the NIA
for the conversion or contribution. The NIA can be earnings or losses,
depending on the performance of the account for the period it held the
amount being recharacterized. Contrary to popular belief, it is not
centered around only the asset in which the conversion or contribution
is invested, but on the market performance of all the assets in the IRA
during the period that the amount was held in the IRA. For details on
computing the NIA, see IRS Publication 590 at www.irs.gov.
information on recharacterizations is available in IRS publication 590,
available at www.irs.gov
of the rules that govern IRAs are usually provided in Ed Slott’s IRA Advisor Newsletter.
If you are not already a subscriber and want to get an idea of what the
newsletter includes, you can preview past issues
of the rules that govern IRAs are usually provided in Ed Slott's IRA
Advisor Newsletter. If you are not already a subscriber and
want to get an idea of what the newsletter includes, you can preview past issues before
of the Month
of the Month
I took a
distribution from my 401(k) plan earlier this year. I rolled over the
amount to my traditional IRA within 60-days, so that it would not be
taxable. I now need to take a distribution from the same traditional
IRA, but I understand that I am limited to one 60-day rollover per
year. Is that true?
rollovers are limited to one-per-year. However, the once-per-year
limitation applies only to rollovers between IRAs. If the only rollover
you completed, to the IRA, was the amount you withdrew from your
401(k), then you may still perform a distribution and 60-day rollover
of your IRA balance, as the rollover from your 401(k) is not subject to
this once-per-year limitation.
August 2008 issue
of Ed Slott's IRA Advisor is now available online.
Safeguarding IRAs in
clients worried about the safety of their money in banks?
If any of
those funds are IRAs, read the info in this month's issue on the traps
in moving IRA funds and understanding FDIC coverage for IRAs and other
Earnings Assistance and Relief Tax (HEART) Act of 2008 was signed into
law by the President on June 17, 2008: There are new retirement tax
benefits for members of the Military that could help you help out your
clients who are service personnel.
When should boomers begin collecting benefits?
you a great guide you can use with aging boomer clients.
IRAs in Turbulent Times
SIPC Protection for IRA Funds
Points of FDIC Coverage
When Moving IRA Funds
- Checks Can
Qualify as Trustee-to-Trustee Transfers
Regulation Section 1.401(a)(31)-1, Q & A-4
Protection is Not for Investments
Tax Benefits for Members of the Military
- 10% Early
Distribution Penalty Exception Made Permanent
Military Death Benefits to a Roth IRA
- Other Plan
Expert: Marvin R.
- Ed Slott
and Company, LLC
Should Boomers Begin Collecting Social Security Benefits?
Be sure to
review the August issue and post your questions on our message board at http://www.irahelp.com/phpBB/index.php?area=,
where some of the best experts in the retirement field gather to
discuss technical issues.
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