Life and Death Planning for Retirement Benefits

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Chapter 5: Roth Retirement Plans 251
the amount to the other type of IRA) by recharacterization (see the rest of this , or (if
it is an excess contribution, but the contributor will be eligible to contribute to a Roth IRA
in future years) by absorption 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. 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 A-5. But the employee may
be able to convert the SEP or SIMPLE account to a Roth IRA; See 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; se E) , 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.
5.6.02 Income attributable to the contribution
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. B).
Similarly, to recharacterize an IRA contribution , not only the original contribution but
also any net income attributable to such contribution must be transferred to the other type of IRA.
Reg. A-2(a).
This 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.
A-2(b); A-2(c)(6), Example 1, and “Fouad Example” below.
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: