Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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If a participant who is receiving a SOSEPP from a traditional IRA converts the traditional IRA to a Roth IRA, the conversion is “not treated as a distribution for purposes of determining whether a modification” of the series has occurred, so the conversion itself does not trigger the loss of the penalty-exempt status of the series. Reg. § 1.408A-4 , A-12. However, the conversion does not mean that the participant can stop taking his periodic payments. “[I]f the original series...does not continue to be distributed in substantially equal periodic payments from the Roth IRA after the conversion, the series of payments will have been modified and, if this modification occurs within 5 years of the first payment or prior to the individual becoming disabled or attaining age 59½, the taxpayer will be subject to the recapture tax of section 72(t)(4)(A).” Reg. § 1.408A-4 , A-12; emphasis added. This statement in Reg. § 1.408A-4 seems to assume that the participant converted the entire traditional IRA to a Roth IRA. If he converted only part of the traditional IRA to a Roth IRA, it is not clear whether the rest of his “series” payments would have to come all from the Roth IRA, or proportionately from the new Roth IRA and the (now-diminished) traditional IRA; or whether the participant could take the payments from whichever of the two accounts he chooses. 5.6 Recharacterizing an IRA or Roth IRA Contribution The law provides broad relief to a taxpayer who wishes to “adjust” an IRA contribution by switching the contribution from a Roth IRA to a traditional IRA or vice versa. § 408A(d)(6) . The IRS calls this relief “recharacterizing” an IRA contribution. It is available to anyone who changes his mind about which type of IRA he wants his “regular” contribution to go to, or about a Roth conversion he has done, as well as to someone who need to correct a Roth conversion or contribution for which he was ineligible ( ¶ 5.3.04 , ¶ 5.4.02 ). Reg. § 1.408A-5 , A-10, Example 2. Since recharacterization applies only to IRA contributions, it is not available for in-plan conversions; see ¶ 5.7.11 . A taxpayer who is unhappy with any IRA contribution he made for a particular year, or who discovers that he was not eligible to contribute to the type of IRA he contributed to, or who contributed more than he was entitled to contribute, may have other remedies besides recharacterization: See ¶ 2.1.08 (A)–(E) regarding the ability to return an IRA or Roth IRA contribution (“corrective distribution”). See ¶ 2.1.08 (H) regarding the “absorption” of excess IRA contributions. Not all IRA contributions can be recharacterized. Here are IRA contributions that can be recharacterized:  The only type of rollover contribution that can be recharacterized is a Roth conversion, i.e. a rollover from a traditional plan or IRA into a Roth IRA. The contribution (conversion) to a Roth IRA of a distribution from a traditional plan or IRA may be recharacterized as a contribution to a traditional IRA. Both valid Roth conversions and “failed” conversions ( ¶ 5.4.06 ) may be recharacterized. Reg. § 1.408-8 , A-8(b). Which IRA contributions may be recharacterized

 A regular contribution to an IRA or Roth IRA ( ¶ 5.3.02 ) can be reversed by means of a corrective distribution ( ¶ 2.1.08 (A)-(E)), or (if the contributor was eligible to contribute