Life and Death Planning for Retirement Benefits

42

Life and Death Planning for Retirement Benefits

 A surviving spouse beneficiary can use a rollover or Roth conversion to prevent, delay, or stop RMDs from a plan inherited from the deceased participant. See ¶ 3.2.01 (A), (C), ¶ 3.2.04 .

Adjustment for post-year-end recharacterizations

A “Roth conversion” (see ¶ 5.4 ) can be “recharacterized” (reversed or undone) by transferring the “conversion contribution” (and its earnings) from the Roth IRA to a traditional IRA by a certain deadline. See ¶ 5.6 . If there is a Roth conversion in a particular year (“Year 1”), and that conversion is recharacterized in the following year (“Year 2”; see ¶ 5.6.06 for the deadline), the recharacterized conversion contribution, and the net income—or loss—allocable to it (which must be transferred to the traditional IRA along with the contribution itself in order to have a valid recharacterization; see ¶ 5.6.02 ) are added to the prior year-end account balance of the traditional IRA that received the recharacterized amount, for purposes of computing the RMD for the year of the recharacterization (“Year 2”). This rule applies to recharacterizations of both “failed” ( ¶ 5.4.06 ) and valid Roth conversions. Reg. § 1.408-8 , A-8(b). Note that the amount added to the prior year- end balance is the amount that is actually transferred into the traditional IRA, NOT the prior year- end balance of the Roth IRA itself. Although “regular” (annual-type) contributions to a Roth IRA or traditional IRA can also generally be “recharacterized” as a contribution to the other type of IRA ( ¶ 5.6 ), the special rule of Reg. § 1.408-8 , A-8(b), does not apply to recharacterizations of regular contributions. It applies only to recharacterized conversion contributions, for a good reason. An individual cannot make a contribution to a traditional IRA in the year he attains age 70½ or any later year. § 219(d)(1) . Thus, an individual who is subject to the lifetime RMD rules (which apply to a traditional IRA beginning in the age-70½ year; ¶ 1.4.02 ) cannot make a “regular” contribution to a traditional IRA. He can (if he has compensation income, and his adjusted gross income is below certain levels) make a regular contribution to a Roth IRA , but he cannot recharacterize that contribution as a contribution to a traditional IRA because he is forbidden to make a regular contribution to a traditional IRA; such a purported recharacterization would be an excess IRA contribution ( ¶ 2.1.08 ). ¶ 1.2.05 – ¶ 1.2.07 explain which account balance is used and what adjustments to the balance are required. But the most important thing about that account balance is its value. The value of the account balance is what the ADP is divided into to determine the RMD. IRA providers are required to provide the year-end fair market value (FMV) of the IRA to the IRS annually on Form 5498. Reg. § 1.408-8 , A-10. Except for one special valuation rule for variable annuities (see “C”), there is no guidance on how to determine FMV for RMD purposes. IRS Notices 2002-27, 2002-1 CB 814, and 2003-3, 2003-1 CB 257, both providing guidance to Valuation rules for determining account balance