Life and Death Planning for Retirement Benefits

264

Life and Death Planning for Retirement Benefits

 It is the income from the 2010 conversion(s) that is pushed forward into 2011 and 2012. The individual does not simply calculate the tax at 2010 rates, then pay the tax half in 2011 and half in 2012. If the individual accepts the election to push the income forward, the income resulting from the 2010 conversion(s) will be taxed at whatever rates apply to the individual in 2011 and 2012.  The election is irrevocable and must be made on the tax return for 2010. § 408A(d)(3)(A) , last sentence. If no election is made the default result is that the income is deferred into 2011 and 2012. § 408A(d)(3)(A)(iii) .  An individual who elects to have 2010 conversion income spread into 2011 and 2012, but then withdraws funds from the Roth account in 2010 or 2011, will have the inclusion of those withdrawn amounts accelerated (added to the amount that would otherwise be includible in his income for the withdrawal year on account of the conversion; i.e., zero in 2010 or half the conversion amount in 2011). § 408A(d)(3)(E)(i) .  If an individual who has elected to spread 2010 conversion income forward into 2011– 2012 dies before all the income has been included on his return, all remaining conversion income is accelerated into the taxable year ending with his death. § 408A(d)(3)(E)(ii)(I) . The one exception to this rule is that if a converting participant’s surviving spouse acquires the Roth account that was the subject of this election, she can continue the deferral. § 408A(d)(3)(E)(ii)(II) . “The term failed conversion means a transaction in which an individual contributes to a Roth IRA an amount transferred or distributed from a traditional IRA ...in a transaction that does not constitute a conversion under Sec. 1.408A-4 A-1.” Reg. § 1.408A-8 , A-1(b)(4) (emphasis added). Although this definition has not been explicitly extended to include defective conversions from nonIRA plans, such conversions are probably deemed included in this definition by virtue of the fact that a Roth conversion from a nonIRA plan is treated for tax purposes “as if” it passed through a traditional IRA on its way to the Roth; see ¶ 5.4.04 (A). A failed conversion is generally treated for tax purposes as if the amount transferred to the Roth IRA had been (1) distributed from the original plan or IRA and then (2) contributed to the Roth IRA as a “regular contribution” ( ¶ 5.3.02 ). See Regs. § 1.408A-4 , A-3(b) and § 1.408A-4 , A- 6(c) and ¶ 5.2.02 (E). A failed conversion should be corrected by recharacterization (¶ 5.6) . Reg. § 1.408A-4 , A-3. If not so corrected, a failed conversion has the following effects:  The deemed distribution will normally result in the distribution’s being included in the recipient’s gross income, with no option to spread the income over future years ( ¶ 5.4.05 ). The income-spreading option is available only for Roth conversions, not for other distributions. Failed conversions

 The deemed distribution will be subject to the 10 percent early-distribution penalty if the individual is under age 59½ and no exception applies. ¶ 5.5.02 (A).