Life and Death Planning for Retirement Benefits

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252 Life and Death Planning for Retirement Benefits
 For a corrective distribution, distributing the entire account balance to the participant will
satisfy the requirement of returning the contribution and net income attributable thereto.
 If the entire contribution is being recharacterized, transferring the entire account balance
to the other type of IRA satisfies the requirement. Reg. A-2(b); see Fouad
Example below.
Because Method 1 is much simpler to apply than Method 2 (below), there is an advantage
to keeping each year’s Roth IRA conversion contributions in a separate Roth IRA account (not
commingled with any pre-existing Roth IRA), until the deadline for recharacterizing such
contributions has passed.
Method 2: If Method 1 is not available, then the net income attributable to the contribution
must be calculated using the following formula (Reg. :
Net Income equals:
Contribution x (Adjusted Closing Balance-Adjusted Opening Balance)
Adjusted Opening Balance
See the regulation for details on this formula, and see Reg. A-2, for examples
of applying the formula to Roth recharacterizations.
For purposes of applying this formula, IRAs are not aggregated; earnings are computed
only with respect to the actual account to which the contribution was made, even if the individual
owns multiple IRAs. Reg A-2(c)(4). Compar B).
Fouad Example: Fouad converted $200,000 from his 401(k) plan to a new separate Roth IRA
account in January 2010. This Roth IRA contained no other contributions, received no other
contributions, and made no distributions. By November 2010, the account had declined in value
to $160,000, and he decided to recharacterize. He closed the Roth IRA and transferred its entire
value ($160,000) to a traditional IRA. He has successfully recharacterized his entire conversion,
because he transferred to the traditional IRA the $200,000 contribution plus the “earnings
thereon”; the “earnings” were a loss of $40,000. He can then “reconvert” this IRA to a Roth in
2011 (see .
5.6.03 How to recharacterize certain IRA/Roth IRA contributions
A recharacterization is effected by transferring the contribution that is to be recharacterized
(plus earnings attributable thereto) to the other type of IRA by a certain deadline A
recharacterized contribution will be treated for income tax purposes as having been contributed to
the transferee IRA (rather than the transferor IRA) “on the same date and (in the case of a regular
contribution) for the same taxable year that the contribution was made to the” transferor IRA. Reg.
A-3. Although the Code makes it appear that any transfer of the IRA contribution
amount to the other type of IRA before the applicable deadline is automatically treated as a
recharacterization, the Regulation is clear that the treatment is elective. Reg. § 1.408A 5, A 1(a),
(b), A 6.
For which contributions may NOT be recharacterized, see For partial
recharacterizations, see For the deadline applicable to recharacterizations, see