Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

the amount to the other type of IRA) by recharacterization (see the rest of this ¶ 5.6 ), or (if it is an excess contribution, but the contributor will be eligible to contribute to a Roth IRA in future years) by absorption ( ¶ 2.1.08 (H)).

Here are IRA contributions that can NOT be recharacterized:

 If money has been rolled over from a traditional retirement plan into a traditional IRA via a tax-free rollover (whether by direct rollover or 60-day rollover), the taxpayer cannot later change his mind and “recharacterize” that as a Roth conversion by moving the rolled amount to a Roth IRA. “[A]n amount contributed to an IRA in a tax-free transfer cannot be recharacterized.” Reg. § 1.408A-5 , A-10, Example 4. The individual can convert to a Roth IRA the traditional IRA he has created via this rollover; he just cannot make such conversion “retroactive” to the original rollover.  Similarly, employer contributions to a SEP or SIMPLE IRA may not be recharacterized as contributions to a Roth IRA, because the employer could not have made direct contributions to a Roth IRA in the first place. Reg. § 1.408A-5 , A-5. But the employee may be able to convert the SEP or SIMPLE account to a Roth IRA; See ¶ 5.4.01 (A).  If a nonspouse Designated Beneficiary mistakenly rolls inherited nonIRA plan benefits into the beneficiary’s own Roth IRA (rather than via directed rollover into an inherited Roth IRA; see ¶ 4.2.04 (E), ¶ 4.2.05 ), recharacterization cannot cure the problem. The rollover is treated as a distribution followed by a regular contribution to the beneficiary’s own Roth IRA; it can be recharacterized as a regular contribution to the beneficiary’s own traditional IRA, but it cannot be recharacterized as a contribution to an inherited Roth IRA. One requirement that must be met in order for a returned IRA or Roth IRA contribution to qualify for the special income tax and penalty-avoidance treatment applicable to “corrective distributions” is that the “net income attributable” to the contribution must also be distributed (along with the returned contribution) by the applicable deadline. § 408(d)(4)(C) ; ¶ 2.1.08 (B). Similarly, to recharacterize an IRA contribution ( ¶ 5.6.03 ), not only the original contribution but also any net income attributable to such contribution must be transferred to the other type of IRA. § 408A(d)(6)(B) ; Reg. § 1.408A-5 , A-2(a). This ¶ 5.6.02 explains how to compute the net income attributable to an IRA or Roth IRA contribution for purposes of a corrective distribution or recharacterization. Note that the “net income” may be a negative amount—a loss, in other words. See Reg. § 1.408A-5 , A-2(b); A-2(c)(6), Example 1, and “Fouad Example” below. Income attributable to the contribution

There are two ways to compute the net income attributable to an IRA contribution:

Method 1: If the contribution in question was made to a separate IRA (traditional or Roth) that contained no other funds, and there have been no other contributions to or distributions from that separate IRA, then: