Decedent’s Roth Conversion IRA
Individual age 68 just converted his IRA to a Roth in November 2010. He just passed away on January 30th. If his 69 year old widow makes this her own Roth Conversion IRA, can she, if she wants to, re-characterize this account by October 15th, 2011? Thanks.
Permalink Submitted by Alan Spross on Tue, 2011-02-01 20:25
Yes, she can recharacterize the conversion, partially or completely.
Or as sole IRA beneficiary she can maintain the option of reporting half the conversion this year and half in 2012, although she should also check into opting out of the deferral since her tax rates will rise by having to file single for 2011 and 2012. She could also combine a partial recharacterization with opting out of the deferral so that the amount that remains will be taxed in 2010 on the final joint return.
Since the deadline is several months from now, there is time to analyze her entire financial situation due to his death, the loss of the lowest SS payment etc. But the Oct date only applies if she either files her 2010 return or files a timely extension by April 18th.
Permalink Submitted by Peter Lingane on Tue, 2011-02-01 21:52
Alan-oniras: please share your argument or provide a citation. Thx.
Permalink Submitted by Peter Lingane on Tue, 2011-02-01 22:00
Just to be clear, Reg. 1.408A-5 allows the surviving spouse to recharacterize the John Smith Roth IRA fbo Mary to the John Smith traditional IRA fbo Mary. I understood alan-oniras to say that a surviving spouse can recharacterize the Mary Smith Roth IRA to the John Smith traditional IRA fbo Mary or to, perhaps, the Mary Smith traditional IRA.
Permalink Submitted by Alan Spross on Tue, 2011-02-01 23:01
Yes, although it would be a cleaner path to do so prior to assuming ownership, where 1.408A-5, Q&A 6 is very clear. Attempting to do so after ownership might run into resistance from the Roth custodian.
However, the surviving spouse should still be able to recharacterize the conversion to her own TIRA if she first assumes ownership, or in fact the Roth IRA agreement automatically made the sole surviving spouse the owner with no option otherwise, like some of them do. The ability to recharacterize after ownership by overt assumption or default ownership would lean on the following Q from 1.408A-2:
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Q–4. What is the effect of a surviving spouse of a Roth IRA owner treating an IRA as his or her own?
A–4. If the surviving spouse of a Roth IRA owner treats a Roth IRA as his or her own as of a date, the Roth IRA is treated from that date forward as though it were established for the benefit of the surviving spouse and not the original Roth IRA owner. Thus, for example, the surviving spouse is treated as the Roth IRA owner for purposes of applying the minimum distribution requirements under section 408(a)(6) and (b)(3). Similarly, the surviving spouse is treated as the Roth IRA owner rather than a beneficiary for purposes of determining the amount of any distribution from the Roth IRA that is includible in gross income and whether the distribution is subject to the 10-percent additional tax under section 72(t).
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It does not appear to be the intent to have ownership assumption eliminate the options the decedent would have had if he had lived, or the surviving spouse would have had if ownership had not been assumed. It states the newly owned Roth is treated as if the survivor had owned it all along, and if that is the case, the survivor should still be able to recharacterize the conversion to her own TIRA if done timely. The survivor also gets to include the prior ownership period as her own for 5 year aging purposes.
Permalink Submitted by Sidney Poretsky on Wed, 2011-02-02 16:18
I appreciate your quick response and valuable information. There’s one thing further: The surviving spouse also converted her IRA to a Roth IRA at the same time. Both IRA’s were in the same mutual fund, with the same number of shares in each. Are there any drawbacks to her combining the two now?
Permalink Submitted by Peter Lingane on Wed, 2011-02-02 18:24
Reg. 1.408A-5, A-6c permits the decedent’s representative to recharacterize a Roth conversion “on behalf of a deceased IRA owner…”. Choate says, without citation but see the first sentence of Reg. 1.408A-2, A-4, that an IRA “ceases to be an ‘inherited’ IRA in any sense” once the surviving spouse claims ownership [Choate, 2011, 4.2.01]. I doubt that the decedent’s representative has authority to recharacterize an IRA that was established for the benefit of the surviving spouse.
The decedent’s representative and the surviving spouse are likely the same person in this instance but this does not mean that the representative can do everything that she would be permitted in her personal capacity, and visa versa.
It might be possible to recharacterize the conversion if the transfer to the surviving spouse could be recharacterized but Reg 1.408A, A-4 seems to block recharacterization. ” If an amount is contributed to the FIRST IRA in a tax-free transfer, the amount cannot be recharacterized as a contribution to the SECOND IRA … .” Note that I’m interpreting the transfer to the surviving spouse as a distribution from the inherited IRA followed by a contribution to the IRA of the surviving spouse. I base this interpretation on 408(d)(3)(C)(ii) which says that the prohibition against rolling over an inherited IRA does not apply to the surviving spouse.
The distinction between a contribution and a transfer is important because this reg. allows recharacterization following a tax-free transfer to another IRA.
I conclude that is unclear whether a Roth IRA claimed by the surviving spouse can be recharacterized. It seems prudent to maintain the Roth IRA as an inherited IRA fbo the surviving spouse until the passing of the recharacterization deadline.
Permalink Submitted by Alan Spross on Wed, 2011-02-02 20:39
no frills,
First you asked if she could recharacterize the inherited Roth after assuming ownership of it, but since she also converted her own TIRA to a Roth IRA, she could recharacterize that conversion without the questions attending your first question. But now you are asking about combining the two. Ordinarily there would no reason not to combine two owned Roth IRAs if the beneficiaries are the same, and there was not prior rollover tracking for bankruptcy protection limit purposes. But if you wanted to pursue recharacterization of the inherited Roth, combining these would make any such effort more difficult than it already is.
So does she want to retain both of them as owned Roth IRAs now, or recharacterize one or both?
If you still want to pursue the original question, it would take a letter ruling request to be on sound ground with that. In that light, it might be material to clarify whether the Roth agreement automatically defaulted to spousal ownership upon the first spouse’s death or not. Some Roth agreements do exactly that, and if that applied here the contract made her the owner rather than her own assumption.
Permalink Submitted by Liz Goldstein on Mon, 2011-05-02 14:45
This is an extremely helpful discussion. Why is it material whether the Roth agreement automatically defaulted to spousal ownership upon the first spouse’s death? Does this eliminate the roll over step when she made the Roth IRA her own?
Permalink Submitted by Alan Spross on Mon, 2011-05-02 18:26
It would not eliminate any steps since the Roth should still be re titled, a death cert would be required, and the surviving spouse would still have to name their own beneficiaries. What it would do is eliminate the need for RMDs that might accrue if the Roth was considered inherited rather than owned, and if the Roth was not qualified and the survivor distributed earnings prior to 59.5, the ownership status would result in a penalty on the taxable portion of any distribution. This penalty would not apply if the Roth was still deemed to be inherited rather than owned.
Relative to the context of this entire thread, the central issue was whether the decedent’s representative could have the decedent’s conversion recharacterized back to a TIRA AFTER the surviving spouse assumed ownership. The IRS Regs are not very clear on this question, but based on the presumption that the Regs indicate that the new Roth was considered to be the surviving spouse’s Roth all along, then the conversion was also the survivor’s and could be recharacterized by the survivor. But if the decedent’s representative was NOT the surviving spouse, can the representative override the surviving spouse’s wishes and still have the conversion recharacterized? IRA custodians are not going to want to make this call and expose themselves to litigation, and would likely refuse to recharacterize the conversion if all parties were not in agreement. While default ownership provisions in the agreement would not be expected to change that conclusion, it is possible that if it came to an IRS letter ruling, the IRS may be more sympathetic if the surviving spouse was made owner by default rather than overtly rolling the inherited Roth over.
This issue seems likely to result in litigation, yet I have not heard of any cases or IRS rulings on this issue.
Permalink Submitted by Liz Goldstein on Mon, 2011-05-02 19:30
Thank you. That is helpful. In our case, the husband last year converted his IRA to a ROTH IRA. So, just to be clear the fact that the spouse rolls over the husband’s ROTH IRA to a ROTH IRA in her own name does not destroy the ability to permit the recharacterization because additional tax-free transfers are permitted after the initial conversion contribution and the regs provide that once the IRA is assumed by the spouse it is treated as though the spouse owned the IRA all along.
We are facing this exact issue and the executor is the spouse who was the beneficiary of the her deceased huband’s Roth IRA and who claimed the Roth IRA as her own. She now wants to recharacterize the ROTH as a TIRA. The IRA custodian will not allow the recharacterization without a private letter ruling. I have reviewed the regs and agree with you that it should be permitted based on the reasoning you describe above. I also agree with you that there is no current private letter ruling on guidance on this exact point. I think it is unfair for the custodian to require a private letter ruling.
Permalink Submitted by Alan Spross on Mon, 2011-05-02 20:28
Under these circumstances, the IRA custodians are more likely to be the point of resistance than the IRS, although we understand that the Regs are not clear on this. A PLR will cost about 10k plus legal costs.
Possible alternatives:
1) Find a custodian that will agree to do the recharacterization and then transfer the Roth IRA to that custodian. A large custodian such as Schwab, Fidelity or Vanguard is a better bet because of their large tax divisions.
2) See if the current custodian will do this with a signed hold harmless agreement including a provision to indemnify them for their costs if the IRS shoots down the recharacterization. One positive is that if the recharacterization is not allowed, the survivor will probably be able to simply reconvert back to the Roth IRA.