Friday, October 8, 2010

Are You An IRA Expert? Roth Recharacterizations

Welcome to the first installment of “Are You an IRA Expert?” Always thought you knew more than the next guy about IRAs and retirement accounts? Well now’s your chance to prove it. Below are three questions, ranging from beginner to expert. Test your IRA skills by trying to get all three right!


Beginner: What is the last day a 2009 Roth conversion can be recharacterized?

Intermediate: In 2010, everyone with an eligible account (i.e. IRA, 401(k), SEP IRA) can make a conversion to a Roth IRA. In 2009 however, there were still two restrictions that prevented some people from being able to make Roth conversions. What were they?

Expert: Sally has a $50,000 IRA. On December 28, 2009, Sally took the $50,000 out of her IRA and put the money into her checking account at the bank. Later, on February 21, 2010, Sally took the $50,000 from her checking account and deposited it into a Roth IRA. Is this a valid Roth IRA conversion? And, if yes, in what year did the conversion take place?


Beginner: Roth IRA conversions are able to be recharacterized up until October 15th of the calendar year after the conversion. Therefore, a 2009 Roth IRA conversion can be recharacterized up until October 15, 2010. That’s one week from today, so if you have a 2009 Roth conversion that you’re planning to recharacterize, you better get a move on!

Intermediate: In 2009, you were ineligible to make a Roth IRA conversion if you had modified adjusted gross income (MAGI) over $100,000. The $100,000 mark was a fixed limit, regardless of whether you filed single or a joint return. Also in 2009, you were ineligible to convert to a Roth IRA if you were married but filed a separate return from your spouse. Thankfully, as noted above, these restrictions have now been permanently lifted.

Expert: Roth conversions may be made via trustee-to-trustee transfers or via 60-day rollovers (as described in the example above). In the example, the funds left Sally’s IRA on December 28th, but were put into her Roth IRA on February 21st - within the 60-day window. Therefore, this is a valid rollover. And as for what year the conversion took place - 2009! That’s right, a Roth conversion is determined by the date the funds leave your traditional IRA, not the date they go into the Roth.

So how’d you do? Are you an IRA Expert? Unless the answer is a resounding yes, you may want to consider consulting with an advisor who has specialized knowledge and training in this area when you have these, or other IRA questions.

By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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