Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

However, if the individual carried out a “legal” Roth conversion ( i.e., he was eligible to and did properly convert), and seeks permission to recharacterize late due to a decline in value in the account following the conversion, the IRS is not likely to grant the extension absent evidence of some good reason why the individual missed the deadline, such as error by a professional advisor. See PLR 2010-24071. Once a recharacterization of an amount converted from a traditional IRA to a Roth IRA occurs, the individual “may not reconvert that amount” to a Roth IRA until the taxable year following the taxable year of the original conversion, or until at least 30 days have elapsed since the recharacterization, whichever is later. Thus, recharacterization cannot be used to flip back and forth quickly between traditional and Roth IRA status. Reg. § 1.408A-5 , A-9. If the individual attempts to reconvert before the prescribed time period ends, the result is a failed conversion. See ¶ 5.4.06 . Essentially, this rule bars immediate “reconversions” only for an individual who converted all of his traditional IRAs to a Roth IRA. Someone who converted only part of his traditional IRAs can avoid the effect of the rule by simply converting some other amount immediately before or after he recharacterizes the first Roth conversion. Brittany Example: Brittany’s IRA (traditional IRA #1) in 2010 holds 30,000 shares of Acme stock worth $10 a share ($300,000). In January 2010 she moves 10,000 shares from her traditional IRA #1 to Roth IRA #1, thus effecting a $100,000 Roth conversion. A month later the Acme stock has declined to $7 per share, so her Roth IRA is worth only $70,000 and her traditional IRA only $140,000. Brittany wants to undo her Roth conversion that occurred at a higher price, but she wants to stick with her goal of converting about $100,000 worth of Acme stock in 2010. She recharacterizes the first conversion by moving the Acme stock out of Roth IRA #1 back to a new traditional IRA (IRA #2). She then immediately transfers another $100,002 worth of Acme stock (14,286 shares at $7) from traditional IRA #1 to Roth IRA #2. This new conversion is not banned because it is not a conversion of the same “amount.” A Roth conversion that was effected by transfer to a Roth IRA from a nonIRA plan can be recharacterized under § 408A(d)(6) . Notice 2008-30, 2008-1 CB 638, A-5. The rule banning same- year reconversions, by its explicit terms, applies only with respect to recharacterized conversions from an IRA to a Roth IRA, not to conversions from a nonIRA plan. The ban presumably also applies to plan-to-Roth-IRA conversions, under the rule that plan-to-Roth-IRA conversions are taxed “as if” the money went through a traditional IRA first on its way to the Roth IRA; see ¶ 5.4.04 (A). 5.7 Designated Roth Accounts In 2006, a new type of “Roth” plan joined the roster, the “designated Roth account” (DRAC) inside a “cash-or-deferred arrangement” (CODA) plan. Same-year and immediate reconversions banned

Meet the DRAC: Roth 401(k)s, 403(b)s, 457(b)s

Employees have long been permitted to make “elective deferral” (also called “salary reduction”) contributions to workplace retirement plans. Under such a “cash-or-deferred arrangement” (CODA) , the participant can choose either to receive a certain amount of his