Life and Death Planning for Retirement Benefits

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Chapter 5: Roth Retirement Plans 257
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.
5.6.07 Same-year and immediate reconversions banned
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. A-9. If the individual
attempts to reconvert before the prescribed time period ends, the result is a failed conversion. See
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 Notice 2008-30, 2008-12 IRB 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 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.
5.7.01 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