Ed Slott's Free IRA Updates June 2008


ed slott

ed slott & co

ira flow chart


Ed Slott's Free IRA Update

August 2008

Volume 1, Number 8


In This Issue

  • Focus on Recharacterizations 
  • Question of the Month
  • News, Rulings and Other Updates
  • Retirement Planning Tip
  • Ed Slott’s IRA Advisor – August Issue




August Focus – Recharacterizations

There are 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 traditional IRA.


Note: A recharacterization from a Roth IRA cannot be made to a SIMPLE IRA, unless the conversion occurred from a SIMPLE IRA.


In 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.


Partial Recharacterizations Allowed

Individuals 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 $100,000.



Reasons for Recharacterization

Individuals recharacterize conversions and contributions for two reasons:

  1. Because 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.


An 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.


  1. Because 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.


Individuals 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.



Deadline for Recharacterizations

In many 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 recharacterization.


Recharacterizations 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.


Calculating the NIA

A 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.


Detailed information on recharacterizations is available in IRS publication 590, available at www.irs.gov


Explanations 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 subscribing.

Explanations 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 subscribing.

Set yourself apart from the competition, and bring in millions in new IRA rollover business by subscribing to Ed Slott's IRA Advisor Newsletter and attending Ed Slott's IRA Workshops. Click here to see a schedule of upcoming workshops.

Question of the Month

Question 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?




Yes, IRA 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. 


News, Rulings and Other Updates

Private Letter Ruling 200828031: The individual took a distribution from his IRA with the intent of rolling over the amount within 60-days. He claimed he was unable to complete the rollover because the funds were misappropriated by his financial advisor. The individual issued a check to his financial advisor’s company, with instructions to use the amount to establish his IRA. The financial advisor appropriated the funds for his personal use. The financial advisor, who committed suicide, confessed all of this in a suicide note. Based on the facts presented, the IRS extended the 60-day period for completing the rollover.


Private letter Ruling 200827035: The individual requested a direct rollover from her 401(k) account to her traditional IRA. A representative from the IRA custodian wrote the wrong account number on the direct rollover request. As a result, the amount was rolled over to a non-retirement account. By the time the taxpayer discovered the error, it was past the 60-day deadline. The IRS extended the 60-day rollover period because of the error made by the financial institution.


August Retirement Planning Tip

Roth IRA distributions are tax and penalty free if they are qualified. Qualified distributions are those that meet the following two requirements:

    1. The Roth IRA owner must have established and funded a Roth IRA for at least five years, and
    2. The distribution must be taken as a result of the owner’s death, while the owner is disabled, when the owner is at least age 59 ½, or if up to $10,000 is withdrawn and used toward a first-time home purchase for an eligible individual. See IRS Publication 590 at www.irs.gov for details.


It makes sense therefore, for individuals who will be funding Roth IRAs to start the five year clock as quickly as possible. For those who are eligible to fund a Roth IRA, a small amount can be used to start the account if the individual cannot afford to contribute a large amount. It may make sense to keep these small amounts with a firm that does not require a minimum balance and does not charge administrative fees to the account, so that the balance is not eroded by fees


Highlights from Ed Slott’s IRA Advisor Newsletter - August 2008 Issue

The August 2008 issue of Ed Slott's IRA Advisor is now available online.

Safeguarding IRAs in Turbulent Times:

Are your 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 accounts.

The Heroes 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?

We give you a great guide you can use with aging boomer clients.


Feature Article

Safeguarding IRAs in Turbulent Times

FDIC and SIPC Protection for IRA Funds

  • Fine Points of FDIC Coverage
  • Caution When Moving IRA Funds
  • Checks Can Qualify as Trustee-to-Trustee Transfers
  • IRS Regulation Section 1.401(a)(31)-1, Q & A-4
  • FDIC Protection is Not for Investments


Retirement Tax Benefits for Members of the Military

  • 10% Early Distribution Penalty Exception Made Permanent
  • Tracking IRA Repayments
  • Contributing Military Death Benefits to a Roth IRA
  • Other Plan Provisions


Guest IRA Expert: Marvin R. Rotenberg

  • IRA Consultant/Speaker
  • Ed Slott and Company, LLC
  • When 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.

To view current and past issues of the IRA Advisor, click the link below to access our "Subscribers Only" section of our website:
http://irahelp.com/newsletter.php?area=a (for America Online users)

If you do not already subscribe to Ed Slott's IRA Advisor Newsletter, you may do so by clicking here and providing the required information, or by calling 800-663-1340. Each issue is 8 full pages of must-have tax information. Individuals who subscribe to the online version of the Ed Slott's IRA Advisor Newsletter, receive access to back issues at no additional cost.

Ed Slott and Company-100 Merrick Road, 200 East, Rockville Centre, NY 11570
Send comments about this newsletter to Ryan@irahelp.com


Ed Slott's Exclusive 2-Day IRA Workshop, Instant IRA Success

Put today's $10 trillion IRA market to work for you and your clients!