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Showing posts with label Roth recharacterization. Show all posts
Showing posts with label Roth recharacterization. Show all posts

The IRA Owners' Bill of Rights

Yesterday, the IRS released a "Taxpayer Bill of Rights," to help organize "the dozens of existing rights in the Internal Revenue Code into ten fundamental rights," as well as make the "rights clear, understandable, and accessible for taxpayers and IRS employees alike."

With that in mind, it occurred to me that IRA owners would benefit from an "IRA Owners’ Bill of Rights," of sorts, to help understand certain aspects of their retirement accounts. Below is a list of 10 key rights that any and all IRA owners should be aware they have. Before we get to that, however, just two quick, important notes regarding the list:
  1. This is an IRA Owners’ Bill of Rights list. In some cases, the rules for plans, like 401(k)s, are different.
  2. These rules are the rules that are allowed under the tax code. In certain situations, your “rights” can (but may not necessarily) be limited by your IRA custodian.

The IRA Owners’ Bill of Rights

1. You have the right to move your IRA account at any time, and as often as you like, from one IRA custodian to another via a direct transfer. Note that this right does not apply to 60-day rollovers.

2. You have the right to convert any or all of your traditional IRA to a Roth IRA at any time. There are no age limits, income limits, earnings requirements, dollar amount limits, etc. It’s your call when and if to do it, and if so, for how much. Period.

3. You have the right to recharacterize (undo) all or any portion of a Roth IRA conversion for any reason up until October 15 of the calendar year following the year you convert. This is one of the few tax-planning strategies you can change your mind about well after the fact and essentially go back in time as if it never happened.

4. You have the right to name anyone you want as your beneficiary. Unlike certain qualified plans subject to ERISA rules, like 401(k)s, your spouse does not have to be your beneficiary. Your beneficiary can be your spouse, but it could also be your children, grandchildren, a charity, a trust, or any other person or entity you so choose. (Note: If you live in a community property state, your spouse may automatically be entitled to a portion of your IRA under state law)

5. You have the right to change your beneficiaries at any time. This is one of the rights you should always be sure to exercise when circumstances change. Anytime there is a birth, death, marriage, divorce or other life event, you should check to make sure your beneficiary form still aligns with your wishes.

6. You have the right to take a distribution from your account at any time. There is nothing in the tax code that prevents you from taking money out of your IRA when and if you want it. That said, there are obviously consequences for any actions you take, such as the 10% early distribution penalty for pre age 59 ½ distributions, so just be smart about when you choose to exercise this right.

7. You have the right to withhold 0%, 10%, or more than 10% from your IRA distributions. This differs from plan rules, where there is generally a mandatory withholding of 20% on all pre-tax distributions. Just because you have the right to forgo withholding, though, doesn’t mean you should. Always check with your tax professional to make sure that your withholding choices are in line with your overall tax plan so you avoid unnecessary penalties.

8. You have the right to invest in just about anything you want, other than life insurance, S-Corp stock and collectibles.

9. Your have the right to do whatever you want with your retirement funds, after you distribute them. Want to purchase life insurance or S-Corp stock? No problem. Just take a distribution from your IRA. Once the money is out of your IRA and you’ve paid tax on it, it’s “regular” money… and best of all, it’s yours to do whatever you want with!

10. You have the right to make good decisions that will save you valuable tax dollars and make your retirement account worth much more over the course of your life and the lives of your beneficiaries. Similarly, you also have the right to make poor choices that will cost you and your loved ones valuable tax dollars. The choice of which of these rights to exercise is up to you, so always make sure you evaluate your decisions carefully, have a plan and stick to it. And when in doubt, remember that you also have the right to seek advice from a qualified professional.

- By Jeffrey Levine and Jared Trexler

Your 3 Question Mid-Year IRA Checkup

financial IRA checkupSo, you make your way into the financial "doctor's" office, armed with all of your bank and retirement account statements. What should you expect from the meeting - what burning questions should you and your financial team have the answers to? I examine the mandatory 3 questions that must be asked and answered below. 

1. Have you already made your 2014 IRA/Roth IRA contribution?
If you’re eligible to do so and haven’t already made a (full) contribution to your IRA or Roth IRA for 2014, there’s no better time to do so than now. There are countless articles that espouse the benefits of early-year contributions vs. those made later in the year - and I even made a short video on this topic for The Slott Report earlier this year - but maybe you simply didn’t have the funds to make a full IRA contribution on or close to January 1 earlier this year. That doesn’t mean that you should wait until next tax season to make a planned contribution though.

If you have the ability to make a contribution now, don’t wait. Maybe you’ve been able to sock away some free cash over the first half of the year, or maybe that tax refund finally came in … whatever the reason, if you’re able to make your contribution now, don’t wait. Sure, it would have been better if you had been able to do so on January 1, but doing so today is still much better than making your contribution at the end of this year or next year at tax time. If you can’t afford to make a full IRA contribution of $5,500 ($6,500 if you are 50 or older by the end of this year), then consider making smaller periodic contributions to your account instead. At the heart of it, it boils down to these simple well-known facts:
1) Something is more than nothing
2) Today is better than tomorrow

2. Have you considered a 2014 Roth IRA conversion?
We’re now about half-way through the year, so by this point, although some things are still bound to change, you probably have a pretty decent idea of what your income is going to look like for the year. With that in mind, you can do a little planning with your tax and/or financial advisor, or some simple calculations on your own to see if a 2014 Roth conversion may benefit you. Remember, making a Roth conversion adds income to your tax return for the year, so it will increase your current tax bill. Distributions in retirement, however, will generally be tax-free, and there are no RMDs for Roth IRAs, as there are for their traditional IRA counterparts.

Two more thoughts to keep in mind while you consider if a Roth conversion is right for you:
1) Roth conversions don’t have to be all or nothing. Partial conversions are allowed.
2) If you are unhappy with your Roth IRA conversion decision or the resulting tax bill for any reason, you can recharacterize (undo) your 2014 Roth IRA conversion anytime up through October 15, 2015.

3. Are you aware of all the new rules that may (or may not) affect you?
If there’s one thing constant in the IRA world, it’s change. It seems that nearly every year there are new rules that phase in and others that phase out. On top of all of that, there are always court decisions, IRS rulings and other guidance that reshape the retirement account landscape. Some of the key developments that have occurred over the last year are:

1) The provision for qualified charitable distributions (QCDs) expired at the end of 2013 (although there’s a good chance Congress will renew it at some point, retroactively, for all of 2014)

2) In June of 2013, the United States Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) as unconstitutional. As a result, many same-sex couples are now considered married for federal income tax purposes. This includes the IRA rules.

3) In January of 2014, the Tax Court issued a landmark decision in Bobrow, in which it ruled the once-per-year IRA rollover rule applies in aggregate to all of a person’s IRAs. IRS has said it will begin enforcing this decision as early as January 1, 2015.

- By Jeffrey Levine and Jared Trexler

The Top 10 Roth Conversion Mistakes

We end Roth Conversion Week with a list you never want to be on. Roth conversions are powerful, tax-free retirement vehicles if handled correctly, but if a mistake is made, you may owe a good portion of your hard-earned savings to taxes and penalties. Here's a list of the Top 10 Roth IRA (and conversion) mistakes you must avoid.

1. Making a contribution when you are not eligible - There are income limits for making a Roth IRA contribution. They are indexed for inflation and can be found in IRS Publication 590 or on our website at www.irahelp.com/2014. You also must have compensation (generally earned income) in order to make a Roth contribution.

2. Contributing more than the annual limit - In 2014, the most you can contribute to a Roth IRA is $5,500 (plus an extra $1,000 if you are age 50 or over during the year). Any amounts you contribute to a traditional IRA will reduce the amount you can contribute to a Roth IRA, dollar-for-dollar.

3. Funds being moved from an IRA to an IRA get put into a Roth IRA instead - This could be due to your own error, your advisor’s error or one made by your IRA custodian. Always follow up to make sure funds land in the right account. On the other hand, since this is technically just an accidental Roth IRA conversion, you can always recharacterize the money back to a traditional IRA by October 15 of the year following the year the mistake occurred - if you have discovered the error. Again, always follow up.

4. Doing a “back-door” Roth conversion and not using the pro-rata rule - When doing a Roth conversion that includes after-tax amounts, you must include the balances in all IRA accounts, not just the account being converted. The pro-rata formula can be found on IRS Form 8606, which must be filed with the account owner’s tax return.

5. Incorrect valuation of assets when doing a Roth conversion - Many tax scams are based on undervaluing assets. This is also true when it comes to Roth IRA conversions. A fair market value must be used for the asset converted. A common example is an annuity contract with riders. Such riders can increase the fair market value of the annuity contract, increasing the tax you will owe if you do a Roth conversion of the IRA annuity.

6. Shifting self-employment or business income into a Roth IRA to avoid income tax - This was a popular “strategy” for several years, which IRS has now made a listed transaction. It generally involves multiple entities and a self-directed Roth IRA. Eventually, earnings accrue to the Roth IRA and are never taxed as income - or at least that’s what a number of taxpayers thought before the IRS and the Tax Court hit them with, in some cases, millions of dollars in penalties and interest.

7. Doing a recharacterization and not reporting the conversion/recharacterization on the tax return - Sometimes people mistakenly believe that since a full recharacterization effectively cancels out a Roth conversion then nothing has to be reported on their tax return. That’s not true. Certain information, such as the gross distribution reported on a 1099-R by a traditional IRA custodian for the conversion, must be reported on your tax return no matter what.

8. Doing a conversion directly from an employer plan to a Roth IRA and not reporting the conversion on the tax return - This is generally an oversight. The 1099-R from the employer plan will have a Code G for a direct rollover to another plan. This is generally a non-taxable event, but not when the assets go to a Roth IRA. CPAs in the midst of tax season may overlook this unless you remember to tell them that your direct rollover was actually a Roth IRA conversion.

9. Beneficiaries of inherited Roth IRAs not taking RMDs - If you have your own Roth IRA account, there are no required distributions during your lifetime. When a non-spouse beneficiary inherits a Roth IRA, however, they do have required distributions beginning in the year after the account owner’s death. The Roth IRA custodian is under no obligation to tell the beneficiary about those distributions or to calculate them.

10. The biggest mistake of all? Not having a Roth IRA in the first place. You are never too old to do a conversion and you are never too young to start contributing to either a Roth IRA or an employer Roth account.

This article is part of Roth Conversion Week at The Slott Report. Come back all week long for insight and analysis on Roth conversions, the benefits of tax-free planning, the possible pitfalls involved and more. Click here to view all articles.

- By Beverly DeVeny and Jared Trexler

Where Should You Convert? Roth IRA or Roth 401(k)?

You’ve had "the conversion talk" and have decided that a Roth conversion is in your best interest. Now you have a choice ... should you convert your existing 401(k) money to a Roth 401(k) - your plan must have adopted this voluntary feature in order for you to do so - or should you make a conversion to a Roth IRA? While on the surface these two types of accounts are very similar - they both, for example, offer the prospects of tax-free growth and future distributions - there are a number of subtle, and not so subtle, differences that may make one type of conversion far more beneficial for you than the other. With that in mind, here is a summary of some of the most important factors to consider when making this decision:
Key Benefits of Converting to a Roth IRA
  1. The Ability to Recharacterize - If you convert IRA funds to a Roth IRA and are unhappy with your conversion for any reason, you can recharacterize that conversion as late as October 15 of the year following the calendar year you converted. The word “recharacterize” is really just fancy tax-lingo for “undo.” Think of it as the tax version of the Ctrl+Z function on your computer. Should you end up recharacterizing your Roth IRA conversion, it’s treated as if the conversion never took place, eliminating the resulting tax bill. Common reasons to recharacterize a Roth IRA conversion include a drop in value of the account after converting, an inability to pay the resulting tax bill and simply a change of heart. If, on the other hand, you plan on converting plan assets to a Roth 401(k) or similar account (an in-plan conversion), you’d better double triple check and make sure you’ll have the money to pay the tax bill. There is no recharacterization option for in-plan conversions. Period. End of story. Once you take the leap, there’s no going back and the resulting tax bill is going to have to be paid one way or another. Owing money to any creditor is no fun, but outside of say, Tony Soprano, the IRS might be the worst creditor to have. Even going bankrupt won’t help you get out of that debt.
  2. No RMDs - One of the biggest benefits of a Roth IRA is that there are no RMDs (required minimum distributions) during your lifetime. This allows your money to compound tax-free for as long as possible. In fact, the ability to eliminate RMDs is one of the most cited reasons people convert in the first place. Here’s the crazy thing, though. Only Roth IRAs have no RMDs. Roth 401(k)s and similar plan Roth accounts do! So if your Roth conversion is to a Roth 401(k) instead of a Roth IRA, you’ll generally still need to begin taking RMDs from that account when you turn 70 ½. If you’re still working at the time, you may be able to defer RMDs until December 31 of the year you retire. Of course, you can always get around this rule by transferring these amounts to a Roth IRA before that time, but if that’s the case, why not do the conversion to a Roth IRA in the first place and eliminate a step?
Other benefits of converting to a Roth IRA instead of a Roth 401(k) include:
  • A common clock for all Roth IRAs for the 5-year qualified distribution rule
  • Distributions are subject to ordering rules, allowing contributions and conversions to be distributed tax-free prior to any earnings (conversions may be subject to the 10% penalty).
  • Generally a broader selection of investment options
  • Funds may be accessed at any time whereas Roth 401(k) funds are still subject to the plan’s distribution rules
  • IRA-only exceptions to the 10% early distribution penalty
Key Benefits of Converting to a Roth 401(k)
  1. Federal Creditor Protection - Perhaps the biggest reason that a conversion at the plan level might make more sense for you than a Roth IRA conversion is when you have concerns about creditor protection. Creditor protection for IRAs, including Roth IRAs, is based on state law. In some states, like New York, that protection is very strong. In other states, however, there is reduced protection from creditors, or, in some cases, very little creditor protection at all. 401(k) plans, on the other hand, usually have very strong creditor protection provided to them at the federal level under ERISA (Employee Retirement Income Security Act). This protection shields assets in these plans regardless of where you live. While, to an extent, this protection may be advantageous for anyone, it is most commonly a key part of the Roth conversion decision for doctors, lawyers, contractors and other high-risk-of -being-sued professionals living in states with insufficient protection for IRAs.
  2. Simplicity - Somehow, in today’s high-tech, high-efficiency, fast-paced world, there seems to be less time than ever before. With so much to do and so little time in which to do it, who needs to keep track of accounts all over the place? That, at least, is the attitude of many retirement savers today and, frankly, it’s hard to blame them. If you’re still working and have a 401(k) or similar plan, converting within the plan can help you keep all your retirement money in one spot and simplify your life. Of course, you should probably balance the advantage of simplicity against any disadvantages of doing the conversion in-plan rather than to a Roth IRA.
    Other benefits of converting to a Roth 401(k) instead of doing a Roth IRA conversion include:
    • The ability to take a loan from the funds
    • The ability to purchase life insurance with the funds
    • Plan-only exceptions to the early distribution penalty
    This article is part of Roth Conversion Week at The Slott Report. Come back all week long for insight and analysis on Roth conversions, the benefits of tax-free planning, the possible pitfalls involved and more. Click here to view all articles.

    - By Jeffrey Levine and Jared Trexler

    IRA Custodian Creates 60-Day Rollover Problems

    In a recent 60-day rollover private letter ruling request, an individual was allowed to complete a rollover of only a portion of his IRA distribution. Here is what happened.

    “Tony” wanted to do a Roth conversion of his SEP account balance. The new Roth account was an annuity. On August 10, Tony completed the Roth conversion paperwork. Six weeks later, and before his funds had left his SEP IRA account, Tony sent a cashier’s check to the Roth IRA custodian and directed that the funds be placed in his new Roth IRA. The custodian instead placed the funds in a non-IRA account.
    IRA rollover problem
    The delay by the SEP IRA custodian is one of the primary reasons why individuals do 60-day rollovers to move IRA funds. It is really hard to believe that it would take any financial institution more than six weeks to send your funds to another institution.

    But Tony created more problems by his actions. Tony cannot front his own personal (non-retirement account) money to make the deposit in the Roth IRA and pay himself back when the IRA funds are finally released by his seemingly very reluctant SEP IRA custodian. If the Roth IRA custodian had followed Tony’s instructions, he would have had non-qualified funds in a qualified account. Tony’s personal funds are not eligible to go into a Roth IRA for anything other than an annual contribution. Any amount above that would be subject to a penalty of 6% per year for each year it remained in the Roth account. Luckily for Tony, the Roth IRA custodian did not put the funds in a Roth IRA, but instead put the funds into a non-qualified account, which is actually where they belonged.

    Then Tony got the check from the SEP IRA and deposited the funds into his own checking account. Less than two weeks later, he sent money to the Roth custodian and requested a recharacterization of the Roth IRA. A Roth recharacterization can only be done as a direct transfer, never as a 60-day rollover. Apparently Tony did not understand the IRA rules at all. The Roth custodian placed the additional funds in a non-qualified account as well.

    The end result of all of this was that IRS let Tony put some funds back into an IRA, but not the full amount of his original SEP IRA balance. Both of Tony’s IRA custodians made mistakes here. The SEP custodian did not timely release Tony’s IRA funds. The Roth custodian apparently did not tell Tony that his funds went into non-qualified accounts, despite his instructions to the contrary. But Tony made mistakes too. He did not follow the most basic of the IRA and Roth IRA rules. He was only spared the consequences of his actions by the mistakes of his custodians.

    Because of a recent Tax Court ruling, it will be more difficult for individuals to move their IRA funds beginning next year. In the Bobrow case, the Tax Court determined that the tax code only allows an individual to do one 60-day rollover to another IRA account per year - not per account. Individuals can still do as many direct transfers as they wish, but only one 60-day rollover. As Tony’s case illustrates, custodians can make it very difficult for their customers to do direct transfers.

    - By Beverly DeVeny and Jared Trexler

    Slott Report Mailbag: Can I Recharacterize AGAIN?

    You can't just contribute to an IRA if you have extra money lying around and don't work. It's a fact that many Americans aren't aware of, and it's one that came up in this week's Slott Report Mailbag. We also examine the ability to recharacterize part of a Roth conversion more than once and the process for establishing IRA annuities. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


    ed slott IRA questions
    Send questions to [email protected]
    I converted a regular IRA into a Roth IRA. When doing my tax return, I found that this put me into a higher tax bracket so I recharacterized part of the conversion to what I thought put my taxable income back into the lower tax bracket. However, I now find that the amount I recharacterized was not large enough. Can I recharacterize some more of the conversion to get my taxable income low enough to put me in the lower tax bracket?

    Yes. There is no limit on the number of recharacterizations that you can do. You can recharacterize some or all of the remaining conversion amount back to an IRA. You must attach a note to your federal income tax return to explain the recharacterizations.


    I'm 54 and collecting disability and a small pension. I have a rollover IRA for which I've been told that I can not add any money to unless it is "earned income." Is this a true statement and if so are there any workarounds?

    You must have earned income (compensation) from working to be able to make an IRA contribution for the year. Disability income and pension income are not considered compensation, so you can’t make an IRA contribution based on those amounts.



    I am considering purchasing several annuities with the money in my SEP IRA. I want to keep the annuities in my IRA. Can I do this? I do not want this to be considered a distribution of the money and therefore cause a major tax problem. Would very much appreciate your direction in this matter.

    Thank you,


    You can invest your SEP IRA funds in a variety of investments, including annuities. Simply find a financial institution that offers IRA annuities (sometimes called qualified annuities) and transfer your IRA funds to that IRA annuity. An important point to keep in mind is that your IRA must purchase the annuity.

    - By Joe Cicchinelli and Jared Trexler

    Slott Report Mailbag: Roth Conversions and Recharacterizations Leave This Reader Confused

    This week's Slott Report Mailbag looks at IRA beneficiary language and procedures as well as Roth conversions and recharacterizations, a topic we cover heavily in Ed Slott's 2014 Retirement Decisions Guide. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


    Hi Ed,

    IRA and retirement planning questions
    Send questions to [email protected]
    I need help! My father passed away in February of 2012. He was listed as beneficiary on my sister's IRA. She passed away May of 2012 and did not change the beneficiary. PNC Bank said there are only two choices. The IRA will become part of her Estate, which can be taken out in a lump sum or the Administrator of her Estate can take MRD (minimum required distribution) and the Estate pays the income taxes, which are around 40%. They said there is no option for me, the only heir, to move it to an inherited IRA where I would pay the income taxes at a much lower rate when the MRDs were taken. Does this sound right? Is it just their policy or is this the law? I understand in this case the IRA is subject to pay debt, but there is none. I don't understand why I don't become the beneficiary of the IRA through probate. I hope this makes sense and any knowledge and advice you have on this would be greatly appreciated!

    Thank you,
    Paula Braham

    Assuming your sister’s estate is the default beneficiary under PNC’s IRA document, the only way you can become the IRA beneficiary is if the IRA assets are transferred (or assigned) through her estate to an inherited IRA in your name as beneficiary of her. In some cases, the IRS has allowed a beneficiary of an estate to transfer IRA funds to an inherited IRA in the beneficiary’s name, as beneficiary of the deceased IRA owner. However, because the estate was the original beneficiary, you cannot use your single life expectancy (stretch-IRA) and would have to take the money out over 5 years assuming she died before her required beginning date. Unfortunately though, the IRS has approved these transfers only on a case-by-case basis in Private Letter Rulings (PLRs). The IRS fee for a PLR is $10,000, not including professional fees to draft the ruling. You may want to speak with an attorney who is familiar with this area of the law to see if assigning the IRA assets to you is possible.



    Through my employer, I just switched my 401(k) contributions to a Roth, however I have kept the contributions going into the same fund. So, now my 401(k) and Roth 401(k) contributions are mixed. I can track how much of each type I've contributed, but when it comes time to do a rollover (or qualified withdrawal), will it become difficult to figure out how much should be rolled into each type of 401(k) (Roth v. Rollover) given the gains (or losses) resulting from each type of contribution?

    If so, should I now start directing the Roth 401(k) contributions to a new fund - and move the Roth 401(k) portion of the original fund to the new fund to keep them separate?

    Thanks much,

    The 401(k) plan should be tracking the Roth 401(k) funds and their attributable earnings separately, despite the fact that they are invested in the same fund.


    I am confused by the rules around the Roth conversion and recharacterization process.

    If I want to undo a conversion, I recharacterize the assets back to the traditional IRA…I got that; but to convert those assets again (now at a lower basis), do I have to wait until the next January or can I simply open a new Roth conversion IRA (with a new account number) to convert the assets?

    If the new account is needed, can I then use the old account once January comes for the next year’s conversion without any problems?

    Your articles are so helpful…thank you very much!


    Once you convert and then recharacterize, you cannot reconvert those same funds until the year after the year of the conversion or more than 30 days after the recharacterization, whichever is later. For example: if you converted up to November 30, 2013 and recharacterized in 2014, you have to wait more than 30 days before you reconvert. That is a shorter time period than waiting until the next year (2015). If you converted in March 2013 and recharacterized in November 2013, you can now reconvert because it is now the year after the conversion. The simplest way to think about it is - you can only convert those assets once in a calendar year. You do not need a new Roth IRA for the reconversion. But, if you think you might want to recharacterize again, it is easier if you keep the assets in a separate Roth IRA until the recharacterization time period has lapsed.

    - By Joe Cicchinelli and Jared Trexler

    Early Year IRA Contribution Question-and-Answer

    Last week I posted a video discussing the importance of contributing to your retirement account early in the year. Without putting any more money into your account over the long run, by simply making your IRA contribution early in the year, as opposed to year-end (or even by April 15 of the following year), you can easily wind up with tens of thousands more in your retirement account to spend during your golden years. In response to the video, as well as the time of year in general, we've received a number of questions. Here are some of the most common ones, along with their answers.

    IRA contribution early in yearQ: I haven't yet earned $5,500 in 2014, can I still make a full IRA contribution now?

    A: Yes. As long as you have enough "compensation" - usually earned income - by the end of a year to support a contribution, you can make that contribution at any time during the year, even if you haven't yet received any (or enough) compensation. For instance, on January 1, 2014 you made a full $5,500 ($6,500 if 50 or older by the end of the year) IRA contribution even though you had no compensation for the year yet. As long as you have $5,500 ($6,500) of compensation by December 31, 2014, you’re fine.

    Q: I haven't made my IRA contribution for 2013 yet, but I understand how important it is to contribute to my IRA early in the year. If I only have enough money to make a contribution for one year right now, should I make it for 2013 or 2014?

    A: Although it is important to make your IRA contributions early in the year, if you can only afford to make a contribution for one year right now, you should make it for 2013. You can only contribute to your IRA for 2013 until April 15, 2014. In contrast, you have all the way until April 15, 2015 to make your 2014 contribution. You can make your 2013 contribution now and then, hopefully, before too long, you can follow it up with one for 2014.

    Q: If I make an IRA contribution now and have not yet made a contribution for 2013, will my custodian treat it as a 2013 IRA contribution?

    A: Probably not. In absence of some indication from you regarding the fact that you intend your contribution to be a 2013 contribution, your IRA custodian will almost certainly treat any contribution made in 2014 as a 2014 contribution. If you plan to make a 2013 IRA contribution before the April 15, 2014 due date, contact your custodian or financial advisor to find out what procedures you need to follow to make sure your IRA contribution year is coded correctly. Remember, IRS gets notified of your IRA contributions each year via IRS Form 5498.

    Q: What if I contribute to my Roth IRA now, early in the year, but realize later that I am prohibited from making a Roth IRA contribution because I am over the applicable income threshold?

    A: You have two choices. One option would be to withdraw the contribution and its earnings as a distribution of excess contributions. The other option would be to recharacterize the contribution from a Roth IRA to a traditional IRA. You're probably better off doing the recharacterization. This way, although the money is not growing tax-free, it's still set aside for your retirement and growing tax-deferred.

    - By Jeffrey Levine and Jared Trexler

    Year-End IRA and Retirement Planning Questions Answered

    2014 is almost here, but we wanted to open the Slott Report Mailbag one last time to answer some pressing year-end retirement planning questions, as well as several issues with decisions that will come in the new year. We at Ed Slott and Company want to wish you a Happy New Year and invite you to join us in 2014, as we continue to educated financial professionals and consumers on IRA intricacies as well as tax and retirement planning strategies and updates.
    IRA retirement planning questions
    Send questions to [email protected]


    My wife and I have just one grandchild from one of our two sons (with no current plans for a 2nd). The other son and wife are trying but no luck yet. After our passing, we would like our IRA and Roth IRA to be shared by all grandchildren, likely equally. How can we accomplish this?

    You could name your “living grandchildren” as beneficiary at the time of your death but many financial institutions might not accept that vague beneficiary designation without your grandchildren’s specific names. You may need to consider naming a trust for your grandchildren as beneficiary of your IRAs. Minor grandchildren cannot sign the necessary paperwork to open an inherited IRA, cannot manage the investments, and cannot request the required minimum distributions. You should consult with a financial advisor on the best way for this type of asset to pass to a minor.


    If an IRA to Roth IRA conversion is done on December 30, 2013 can it be recharacterized on January 30, 2014 to avoid liability on the conversion? Can it legally be converted again in 2014 to avoid MAGI (modified adjusted gross income) limits? If the conversion and recharacterization are done before April 15, 2014, how do I show this maneuver when I file my tax return?

    A 2013 conversion can be recharacterized (reversed) up to October 15, 2014. If it’s recharacterized in 2014, that 2013 conversion cannot be reconverted until more than 30 days after the recharacterization. Follow the instructions on IRS Form 1040 and Form 8606 on how to show that on your tax return. You might want to consider having your taxes done by a professional for that tax year.


    Hello Ed and thank you for taking the time to read my question. I have been checking out information on the web with regard to tax implications when withdrawing from a Roth IRA and cannot find the exact answer I want. I am over 60.

    I opened a Roth IRA recently and will be making periodic conversions, over time, from my Traditional IRA. I understand that after the Roth IRA is opened for at least five years, any capital gains become tax free along with the principle.

    Does the five-year starting date begin when I initially open the Roth IRA despite the fact that I will be doing partial conversions for a number of years to follow?

    Please advise and thank you again,

    In your case, because you’re over age 59 ½, there is no 5 year clock with respect to the 10% early distribution penalty on conversion funds being withdrawn within 5 years. However, for purposes of the earnings (there are no capital gains in an IRA) in the Roth IRA you must wait for more than 5 years before those funds can be withdrawn tax-free. Earnings are withdrawn last; withdrawals will be deemed to be made from your conversions first on a first in, first out basis.


    If I have a 401(k) and a traditional IRA at the end of 2013 and then in 2014 roll the 401(k) into a traditional IRA, what happens to the RMD (required minimum distribution) for the 401(k) since it no longer exists? Do I have to take it BEFORE rolling the 401(k) into an IRA?


    The 401(k) RMD must be taken before you roll over the remaining 401(k) funds to the IRA.



    My sister, Ann, age 66, died and left her IRA to her only two sisters, Mary, 69, and Susan, 71. The accounts were separated on time and each sister is in charge of her own inherited IRA. The older sister, Susan, names her younger sister Mary, age 69, as beneficiary of her own inherited IRA. Susan starts taking her RMDs, but dies at age 73 leaving her inherited IRA to the only remaining sister, Mary, now age 71. Can the surviving sister, Mary, who is beneficiary of this account, retitle the account and continue to take RMDs based on the older sister's age and applicable divisor? If so, how should this inherited IRA be named?

    Keep in mind that this only remaining sister would then be taking two RMDs from the original owner's account. One based on her age and applicable divisor and one based on her sister, Susan's age at death and applicable divisor.(i.e., Ann as original owner’s sister Mary as beneficiary or Susan as first beneficiary w/ second sister (Mary) as beneficiary.) I understand why this is so confusing, but really need your advice. Thank you.


    When Mary inherits from Susan, Mary is a successor beneficiary. She is inheriting from a beneficiary and not from the IRA account owner. The required distributions cannot be reset to the successor beneficiary’s age. They must continue based on the original beneficiary’s calculation. Example: Susan is age 40 when she takes her first required distribution. She is using a factor of 43.6. Each year that factor is reduced by 1. When Mary inherits from Susan, she continues using that schedule.

    - By Joe Cicchinelli and Jared Trexler

    IRA Rules to be THANKFUL For

    With Thanksgiving just days away, let’s reflect on some of the IRA rules you should be thankful for this year.

    IRA rules 2013Be thankful that the qualified charitable distribution (QCD) exists, at least through the end of this year (2013). If you are age 70 ½ or older, the QCD provision allows you to give up to $100,000 directly from your IRA to charity. Although you won't be able to take a charitable deduction for that amount, you won’t have to include it in your income for this year either. This helps keep your tax bill lower by preventing your IRA distribution from increasing your income and potentially phasing out personal exemptions or itemized deductions, or from increasing your exposure to the 3.8% healthcare surtax. Plus, the QCD can be used to satisfy all or a portion of your 2013 required minimum distribution.

    Be thankful that there are still no restrictions for Roth IRA conversions. That’s right, no matter what your age, income, account value or any other factor, if you have an IRA or other eligible retirement account, you can convert that account to a Roth IRA today. You will, of course, have to pay the income tax on the amount converted now, but you’ll be creating an account that can grow tax-free for the remainder of your lifetime. As an added benefit, unlike a traditional IRA or company plan, you’ll never have to take distributions from your Roth IRA if you don’t want to.

    Be thankful that if you decide to do a 2013 Roth conversion, you have the flexibility to change your mind all of the way until October 15, 2014. If you change your mind, you can do what’s called a Roth recharacterization, and remove all the tax from your Roth IRA conversion. There’s no specific reasoning required by the tax code to do so, but common reasons you might consider a Roth conversion include:

    1) You don’t have the money to pay the tax
    2) Your account value has dropped since you converted
    3) You’ve simply had a change of heart

    Be thankful that you can generally change your beneficiary form whenever you want. It’s amazing how much can change in a person’s life from one year to the next. From the celebration of a birth or marriage to the heartache of the loss of a loved one, there’s no shortage of life events that can change who you want to name as your IRA beneficiaries. Luckily, as these events occur, you can keep your plan up-to-date, and make sure your hard-earned retirement savings are left to the right people simply by filling out a new beneficiary form.

    Thanksgivukkah wishes to everyone.

    - By Jeffrey Levine and Jared Trexler

    Year-End Roth Conversion Question-And-Answer

    It's that time of year. The leaves are falling. The holidays are coming. And retirement planning quickly turns to year-end conversion questions. To help the financial advisor-client team with your year-end Roth conversion planning, we have assembled a FAQ list below. Also, read through our latest articles on Roth conversion planning.

    Roth IRA conversionQ: What’s the last day I can make a 2013 Roth IRA conversion?
    A: The answer to this question is a little tricky. A Roth IRA conversion will be treated as a 2013 Roth IRA conversion provided the funds leave the distributing account by December 31, 2013. If you make your Roth IRA conversion via a direct rollover or trustee-to-trustee transfer - which is generally the best way to convert - then the funds could go into your new Roth IRA the same day they leave your old account.

    On the other hand, you can do a Roth IRA conversion via a 60-day rollover, though it’s generally not recommended. In such cases, money might not go into your Roth IRA until well into 2014, but could still be counted as a 2013 Roth IRA conversion. For instance, if you take a distribution from your IRA on December 31, 2013 and deposit the funds into a Roth IRA on February 28, 2014 (within 60 days), you’ve still made a 2013 Roth IRA conversion.

    Q: What happens if I make a Roth conversion before the end of the year, but when I meet with my tax preparer to do my 2013 tax return, the tax bill is more than I thought?
    A: No problem. A 2013 Roth IRA conversion can be recharacterized - a fancy tax word for undone - up until October 15, 2014. The recharacterization can be made for any reason, including that you simply changed your mind.

    Q: If I make a Roth IRA conversion now, when do I have to pay the tax?
    A: This depends on a number of factors. Depending on your specific circumstances, you may have to make an estimated tax payment in January 2014. Alternatively, you may be able to square up with IRS anytime before April 15, 2014. Since the answer to this question depends on many variables, it’s best to review this question with a knowledgeable financial advisor or tax professional.

    Q: If I convert today, how soon can I access my Roth IRA?
    A: Right away. As far as the tax code is concerned, there is no waiting period to be able to access your converted funds. If you are younger than age 59 ½, however, distributing converted funds within 5 years of your conversion generally results in a 10% penalty on those amounts. The real benefit of the Roth IRA conversion is in the long-term tax-free compounding, so if you think you will need to tap your Roth IRA funds relatively soon, it’s probably not a good idea to convert in the first place.

    Q: I’ve made Roth IRA conversions in the past. Are there any new rules I need to be aware of for 2013?
    A: The Roth IRA conversion rules haven’t changed much lately. However, there are always changes and new wrinkles in the tax law that can factor into whether or not a Roth conversion makes sense. For instance, beginning in 2013, there is an additional 3.8% surtax on any net investment income that exceeds your applicable threshold. Although IRA distributions are not considered net investment income, a Roth IRA conversion will increase your total income, and could result in the 3.8% surtax being assessed on greater amounts of other, net investment, income. 2013 Roth conversions could also result in the loss or reduction of your personal exemptions and itemized deductions. This was not the case in recent years.

    Q: Can I put my new Roth IRA conversion in my existing Roth IRA account?
    A: There is nothing in the tax code that stops you from doing this, but if there is any chance that you might recharacterize this conversion, you should consider putting it in a separate, new Roth IRA. That will make doing a recharacterization easier. Once you have passed the recharacterization deadline, you can combine your Roth IRA accounts with no worries.

    - By Jeffrey Levine and Jared Trexler

    3 Things You Should Do Right Away If You Missed Extended Tax Filing Deadline

    Did you miss the October 15th extended tax filing deadline? Ed Slott and Company IRA Technical Consultant Jeffrey Levine details 3 things you should do right away if you missed this important tax date.

    If you can't view the video below, click here to get the 3 things to do if you missed the deadline. And make sure you subscribe to our YouTube Channel, IRAtv, to get the latest IRA, tax and retirement planning videos sent straight to your email inbox.

    By Jeffrey Levine and Jared Trexler

    Slott Report Mailbag: Is a Conversion From an IRA to a Roth IRA Subject to the 10% Penalty?

    This week's Slott Report Mailbag looks at the 10% early distribution penalty, which is in affect before age 59 1/2 in many cases. We also answer a tricky question about Roth recharacterizations. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.



    IRAs ed slott
    Send questions to [email protected]
    My daughter is 47 years old. She wants to convert funds from her traditional IRA to fund her Roth IRA each year. Even though she is not age 59 ½, can she move these funds without the 10% penalty since the funds are moving from one IRA to another?


    Scott Wheeler

    A conversion from an IRA to a Roth IRA is taxable, but not subject to the 10% early distribution penalty.


    I have always considered my contributions to my Roth IRA as part of my emergency fund, knowing I could take the contributions (but not the earnings) before I reach age 59 ½ with no penalty. I also contribute to a traditional IRA. There was one year when my income unexpectedly jumped up above the level allowed for a tax-deductible IRA, but I didn’t realize I wasn't eligible until months after I made my contribution. Come April when I did my taxes I had this contribution re-characterized as a Roth IRA and paid taxes on it. My question is this: can the money I re-characterized be included as the portion of my Roth IRA, which can be taken out before 59 1/2 without penalty?

    Yes. Your recharacterized IRA contribution is treated as a Roth IRA contribution that can be withdrawn tax-and-penalty free at any time.


    I made three conversions in 2010. I know that I will be able to make qualified withdrawals on January 2, 2015. I also made a conversion on 1/3/2012. Must this conversion be governed by its own 5-year rule, meaning, qualified withdrawals will begin on 1/3/2017?


    Assuming you are now age 59 ½ or older, there is no separate 5-year clock for purposes of the 10% penalty on the 2012 conversion because that penalty doesn’t apply any longer. But, if you’re under age 59 ½, the 2012 has its own separate 5-year clock with respect to the 10% penalty. With respect to a qualified withdrawal of interest, there is only one 5-year clock that expires on 1-1-15. All of your future Roth IRA withdrawals will be qualified (tax-free) from then on.

    - By Joe Cicchinelli and Jared Trexler

    Slott Report Mailbag: Is a Qualified Disclaimer of an IRA Reported to IRS?

    Retirement planning has many nuances, far more than the average investor can adequately negotiate.  That is why an educated financial advisor is so important. He or she can help said investor navigate all pitfalls and answer all questions. This week's Slott Report Mailbag looks at some tricky subjects - disclaimers, step transactions, investing options within a Roth. These people didn't have the right answers - but a knowledgeable financial advisor should.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.



    I have a question:

    Send questions to [email protected]
    If you disclaim/refuse an IRA inheritance/inherited IRA, is that information reported to the IRS or is it only reported if/when you accept the inheritance and pay tax on it?

    Thank You,

    A qualified disclaimer of an IRA is not reported to the IRS. The disclaimer is filed with the financial institution that has the IRA. If you as beneficiary do not take a required minimum distribution from the IRA and you disclaim your entire portion, you will not receive IRS Form 1099-R.


    Dear Mr. Slott,

    I have purchased most of your courses over the years and have been a follower for many years; however, I have never seen anyone address one question I have. I realize that MLPs (master limited partnerships) are NOT a good investment for IRAs, due to tax consequences. However, since my Roth IRAs are supposed to be tax FREE, can I invest in publicly listed and traded MLPs and REITs (real estate investment trusts) or oil trusts, etc, in my Roth IRA, due to the fact that there are supposed to be no further taxes on my Roth IRA or any legitimate withdrawals? After all, I have already paid all the taxes due on the Roth, so wouldn’t the MLP tax problem NOT exist for the Roth?

    While some investments such as limited partnerships, REITs, and tax-free municipal bonds have certain tax characteristics and benefits when the investments are owned outside of an IRA, those characteristics generally do not apply when the investment is purchased inside any IRA. The taxation of a Roth IRA generally is based on the aggregation and ordering rules, regardless of the investments inside the Roth IRA. However, certain unrelated business and debt financed investments will create unrelated business income tax which must be paid by the IRA or Roth IRA. The IRA must file Form 990-T to report and pay this tax. The issue of taxation of an investment is something you should explore with the promoter or advisor recommending the investment to you.


    Dear Mr. Slott:

    I attended one of your Chicago seminars a few years back, and greatly enjoyed it. You are THE Expert!

    I have an unusual (perhaps unique?) question for you/your staff. I converted a small IRA in 2011, and inadvertently included a very small $2,000 variable annuity contract in the conversion. This particular annuity contract has very desirable guaranteed growth, income and death benefit features, at a very low internal cost. I now would like to make a large addition of rolled-over 401(k) funds to that same contract, but unfortunately, my retirement funds will roll in a traditional rollover IRA. The desired end investment vehicle (my small annuity contract) is now over in my Roth IRA.

    It is too late to re-characterize the 2011 conversion, without a PLR (private letter ruling). But could the following strategy possibly achieve my goal of getting my now Roth account annuity back into a traditional IRA?
    1. Make a new traditional IRA contribution for 2012 or 2013. (This would be my only traditional IRA account, which solves the 'aggregation' issue.)
    2. Convert that IRA to a Roth IRA, combining those converted funds with my small existing Roth IRA account (where the annuity is held).
    3. Then, do a partial Re-characterization a portion of my Roth Conversion amount, and include the annuity contract as part of the value of the recharacterization?
    Basically, I am presuming the IRA assets are fungible, and that the IRS only cares about the amounts converted, and not the specific asset type involved. What am I missing?

    Your thoughts would be appreciated.

    Best regards,

    R. Shawn Jones

    Your series of step transactions only make sense if you do not want to convert the 401(k) balance to a Roth IRA. You do have the ability to convert the 401(k) funds directly to the Roth IRA holding the annuity. If you do not want to pay the income tax on a conversion of the 401(k) funds to your Roth IRA then your IRA contribution that is converted to a Roth IRA will be taxable unless it was a nondeductible IRA contribution. However, you can recharacterize (reverse) that conversion amount or a portion of it (plus its pro-rata gain or loss) back to an IRA using a formula that uses the entire fair market value (FMV) of the Roth IRA. The FMV of the annuity contract in the Roth IRA may be much greater than its cost because of the guaranteed income and death benefits, which must be included in the FMV calculation.

    After the recharacterization amount (including the gain or loss) is calculated, that amount must be transferred back to the IRA. The recharacterization amount can be satisfied by transferring back any asset in-kind from your Roth IRA as long as the FMV of the asset transferred back to the IRA is equal to the recharacterization amount. Also, whether the terms of the annuity contract would allow an in-kind transfer back to your IRA should be addressed with the insurance company before you proceed.

    - By Joe Cicchinelli and Jared Trexler

    Slott Report Mailbag: How Does the New Tax Law Affect Me?

    We have covered the new tax law (the American Taxpayer Relief Act of 2012) from both a retirement planning and tax planning standpoint since it was signed into law by President Barack Obama on January 2, 2013.  We wrote a quick analysis of the law complete with a 5-plus-minute video on 5 key planning pointsWe followed with a detailed look at qualified charitable distributions (a topic we get frequent questions about), and how they were affected by the new law.

    Since then, we have added the following: an in-depth site on 2013 IRA and tax tables, a piece on the many ways taxes have increased (even if your income taxes did not), and a look at the new in-plan Roth conversion provision and how it (and other factors) have made the Roth conversion decision more difficult.

    Send questions to [email protected]
    Yet, this 157-page law is complex, and The Slott Report will cover every inch and answer many questions on the new tax law throughout the year.  We have devoted this week's Slott Report Mailbag to some of the popular questions we have received about the new tax law. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


    My wife and I make $500,000 between us and file a joint tax return. Will our income taxes be going up because of the new tax law?

    Yes. If your taxable income is over $450,000, you will face a new top tax bracket of 39.6%. In addition, you may see your exemptions and deductions reduced, you will have to pay a 0.9% surtax on gross wages in excess of $250,000, and you may also have to pay the 3.8% surtax on net investment income if applicable.


    Talking heads are saying the gift tax exemption became even more advantageous thanks to the new 2013 tax law. What makes it even better now than before?

    The lifetime gift tax exemption is now $5,250,000, up from $5,120,000 last year. In addition, portability, which is a rule allowing a surviving spouse to add any unused exemption amount from his/her spouse to his/her own exclusion amount, has been made permanent.

    The annual gift tax exclusion amount for 2013 is $14,000, up from $13,000 last year. You can give up to $14,000 a year to as many people as you wish, totally free of any gift tax. The reason for the increase is to reflect inflation.


    I want to take advantage of the in-plan Roth conversion provision from the new tax law. I know one of the advantages of a Roth conversion is the ability to recharacterize by a specific date if I see the converted amount dropping in value. Does that also hold true for in-plan conversions?

    No. That is the biggest drawback to doing an in-plan Roth conversion. It is an irrevocable election. There are no do-overs.


    I've heard a lot about a new planning tool that was part of the new tax law. I have a 401(k) plan at my workplace. Can I convert part of that over to a Roth IRA?

    Maybe. If you are eligible to take a distribution from your plan, you can convert that amount directly to a Roth IRA. The new feature in the law was for 401(k) plans (or 403(b) or governmental 457(b) plans) that allowed a Roth feature, known as a Roth 401(k) (Roth 403(b) or Roth 457(b)), within the 401(k) plan. The law now allows all plan participants to convert their 401(k) assets to a Roth 401(k). Employer plans are not required to have a Roth feature and they are not required to allow these in-plan Roth conversions.


    An AMT patch was permanently passed as part of the new tax law. What is an AMT patch and who does it affect?

    The AMT is an alternative minimum tax system. It runs parallel to our "regular" tax calculations. If you have too much income and not enough tax, the AMT will kick in and you will have to pay more in income tax. It was originally instituted to try and make sure that the wealthy paid their fair share of taxes. However, it was never adjusted for inflation so each year more taxpayers were subject to the additional tax. As a result, Congress "patched" the AMT each year. The new tax law included the patch for 2012 and will index the AMT from that amount each year in the future.

    - By Joe Cicchinelli, Beverly DeVeny and Jared Trexler

    Slott Report Mailbag: Can I Claim Roth IRA Losses on My Tax Form?

    A new tax law brings a lot of indecision, and we expect the questions to start pouring in over the Taxpayer Relief Act of 2012. In the short term, we continue to see many questions about how to forge forward with proper planning in 2013, outside any of the tax provisions from the new law.

    This week's Slott Report Mailbag tackles Roth conversion income limits, Roth recharacterizations and the rules governing IRA distributions. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


    Did the income conversion limits on Roth IRA conversions expire with the Bush tax cuts at the end of this year?


    Wayne Sharpe

    There are no income limits to do a conversion to a Roth IRA. The prior income limit of $100,000 was permanently repealed beginning in 2010. Therefore, there is no income limit for a Roth IRA conversion in 2013.


    Hello Mr. Slott:

    Send questions to [email protected]
    I converted $64,000 over my Roth IRA in 2010 to take advantage of paying tax over a two-year period. What I wasn't expecting was for the account balance to drop to $10,000. I have read one of your responses on the web that there is pretty much nothing that I can do to recharacterize, BUT I believe that I once read that if you take a major loss within an IRA, you can withdrawal the money and claim the loss on your taxes. Yes, I know, it doesn't make much sense, but I am reaching as far as I can.

    I've been laid off since 2010 so I'm doing everything possible to relieve our tax burden this April because of my conversion in 2010.

    Thank you for any help you might be able to provide.

    Michael Lally

    Unfortunately, the deadline to recharacterize your 2010 conversion (and eliminate the taxes owed) was October 15, 2011. The only way you can claim a loss is if you withdraw all the funds in all your Roth IRAs and the withdrawn amounts are less than the unrecovered basis (contribution and conversion funds). Then you have to itemize your deductions. Your itemized deductions must exceed 2% of your income before you can actually take a deduction. If you are subject to AMT, your deduction will be disallowed. If you are under age 59 ½, you could incur the 10% early distribution penalty on converted amounts.


    Let's say you have a $10,000 qualified education expense for graduate school for 2013. Can you take a distribution from your traditional IRA and place the funds into your state’s qualified 529 plan so that you can get a state tax deduction for that $10,000 of additional income that you will recognize for 2013?

    Please let me know if you need any further details. I appreciate your help in advance.


    Once you take a distribution from your IRA, you can use those funds for any purpose you want. State tax laws vary, so we cannot answer your question on a state tax deduction. You should consult a tax preparer for help on that part of your question.

    -By Joe Cicchinelli and Jared Trexler

    Recharacterize a 2011 IRA Contribution After October 15? Probably Not

    Monday October 15, 2012 was the deadline to recharacterize an IRA contribution for 2011. Now that we are past that date, is it possible to get an extension for time to do a recharacterization? Probably not.

    ed slott recharacterization deadlineWhen you recharacterize, you essentially change your IRA contribution from one type of IRA to another. In most cases, a recharacterization involves reversing a Roth IRA conversion. Some or all of the conversion can be recharacterized with its net income attributable (gains or losses). A recharacterization can be done for any reason but certain rules must be followed. For example, both the Roth and the traditional IRA custodians must be notified of the recharacterization in writing and the recharacterization must be done as a trustee-to-trustee transfer (a direct transfer, not a withdrawal from the Roth IRA and a subsequent deposit to an IRA).

    Even though the 2011 recharacterization deadline has passed, it might be possible to get more time to recharacterize. The IRS can give you more time beyond the standard October 15 deadline to recharacterize when, based on the facts and circumstances, you acted reasonably and in good faith. The IRS gives the extra time through a private letter ruling (PLR) request. In most of these PLRs, the taxpayers determined, after the October 15th deadline, that their conversions were not allowed because their income exceeded the $100,000 limit in years before 2010. However, the IRS fee for a Roth recharacterization is $4,000, not including professional fees to prepare a PLR request, which can run an additional $5,000 to $10,000.

    From a practical standpoint, unless you can convince the IRS that you have an extenuating circumstance that warrants more to time to recharacterize and you can pay the $4,000 IRS fee plus the tax pro’s fee, you won’t get more time to recharacterize.

    Article Highlights
    • The 2011 recharacterization deadline was October 15, 2012
    • IRS sometimes will give you more time to do a recharacterization
    • The IRS fee for a later recharacterization request (PLR) is $4,000 

    - By Joe Cicchinelli and Jared Trexler

    Instant IRA Success Roundtable: October and Year-End Deadlines, Health Care Tax Issues

    ed slott IRA, retirement and tax videos
    We just returned from Instant IRA Success, which took place this past weekend (September 29-30) at The Cosmopolitan in Las Vegas. The entire Slott Report staff got together to discuss important October and year-end deadlines and the tax issues involved with the Affordable Care Act.  You can view our Instant IRA Success roundtable below, and view any of our other IRA, retirement and tax planning videos are our YouTube page, IRAtv.

    -Compiled by Slott Report staff

    2011 IRA Contribution: It's Not Too Late to Change Your Mind

    Roth IRA recharacterizationEven though the 2011 tax season for most of us ended on April 17, 2012, some of us who made a timely IRA contribution for 2011 might have changed our mind on that IRA contribution. Specifically, some individuals who contributed to one type of IRA for last year may now want to change that contribution into a different type of IRA contribution.

    A “recharacterization” allows individuals, after-the-fact, to change their IRA contribution into a different type of IRA contribution if certain rules are met. The 2011 IRA contribution deadline was April 17, 2012, so anyone who didn’t make a contribution by that time cannot do so now. However, those who did can change their mind by recharacterizing.

    To recharacterize a 2011 contribution, you must have the original contribution (plus interest) transferred directly to the second IRA of a different type (e.g., Traditional IRA to Roth IRA). If this is done by October 15, 2012, you treat the 2011 IRA contribution as having been originally made to the second IRA.

    The most common recharacterization occurs after someone converts funds from a Traditional IRA to a Roth IRA. Afterwards, that individual may want to undo the conversion, usually because they don’t have the money to pay the taxes on the conversion or because the investments in the Roth IRA declined significantly. That person could simply recharacterize the Roth conversion plus its net income (or loss) back to a Traditional IRA. The tax debt on the conversion is erased as if the funds were never converted to a Roth IRA.

    Recharacterizations are not taxable but they must be reported to the IRS, so anyone who filed their 2011 tax return by April 17, 2012 and then properly recharacterizes a 2011 contribution or conversion by October 15, 2012 would have to file an amended tax return to report the recharacterization. Even if you do the recharacterization before you file your return, you must report the recharacterization on your return so that IRS can properly match up the tax reporting for all transactions. We have seen a number of individuals who missed this step and got letters from IRS looking for taxes that were no longer owed due to a recharacterization. The instructions for reporting a recharacterization can be found in the instructions for IRS Form 8606.

    IRS Publication 590, Individual Retirement Arrangements is a good source of information on recharacterizations. Both the IRS Publication 590 and Form 8606 are available on the IRS website www.irs.gov.

    -By Joe Cicchinelli and Jared Trexler

    Company Retirement Plan Distribution Options

    Happy Friday! So, let's say you are leaving or have left your employer. What happens to your retirement plan funds? There are options other than taking a taxable distribution of your retirement account balance.

    Taking a check payable to yourself
    The employer is required to take 20% mandatory income tax withholding on any taxable (pre-tax) funds included in this type of payment. Once you receive the check, you have 60 days from that date to roll the funds over to another employer plan or to an IRA. You can also make up the 20% withheld with other funds you have and put those in the IRA also within the same 60 days. If you do not make up the withheld amount, it will be included in your taxable income for the year and will be subject to the 10% early distribution penalty if you are under the age of 59 ½. If you do make up the withheld amount, you will get back any overpayment of income tax when you file your tax return for the year.

    Taking a check payable to the new retirement plan
    This is called a direct rollover and is not a taxable event. You can have the check made payable to the IRA custodian or to the new employer plan. When you receive the check, you have it deposited in your new account. This is a much better way to move your employer plan funds. There is no 20% tax withholding, no 60-day limit, no waiting for a tax refund, no 10% penalty.

    Do a Roth conversion
    You can move your employer plan funds to a Roth IRA as either a 60-day rollover or as a direct rollover. This will be a taxable event. The amount converted will be included in your income for the year. There is no 10% early distribution penalty on a Roth conversion. A Roth conversion can be recharacterized to an IRA up to October 15th of the year after the conversion if you change your mind.

    Do an in-plan Roth conversion
    If the employer plan has a Roth feature and allows for conversions, you can move your plan funds to the Roth account in your plan. This is a taxable event as noted above. Unlike a conversion to a Roth IRA, there is NO recharacterization feature in an employer Roth account.

    As you can see, there are options other than taking the money and running. Leaving the funds in a retirement account allows them to continue growing and compounding on either a tax-deferred (IRA or plan account) or tax-free (Roth account) basis. These funds can mean the difference between a comfortable retirement and one where you can only pay for necessities. A financial advisor to help you with these choices could mean the difference between success and failure in funding your future.

    -By Beverly DeVeny and Jared Trexler