Conversions and Recharacterizations: The What, Why, and How

Transcription

1 Conversions and Recharacterizations: The What, Why, and How

2 Learning Objectives Describe a conversion and a recharacterization Define the consequences of an ineligible conversion Understand the reporting requirements for conversions and recharacterizations 2

3 Roth IRA Conversions Traditional IRA or SIMPLE IRA (after two years) Direct Conversion Roth IRA Indirect Conversion 3

4 Why would a Traditional IRA or SIMPLE IRA owner choose to complete a conversion? 4

5 Conversion and RMD Traditional IRA or SIMPLE IRA Step 2: Convert remaining balance Roth IRA Step 1: Distribute RMD RMD not eligible for conversion 5

6 I would like to convert my entire Traditional IRA balance ($109,218.43) to a Roth IRA. I haven t taken my RMD for the year, but I know it is $3, May I convert the entire balance? No. Cindy must first receive the RMD as a distribution, and then may convert the remaining balance ($105,232.36). 6

7 Must offer withholding 59½ and older = one IRS code (one Form 1099-R) Withholding on Conversions Under 59½ = two IRS codes (two Forms 1099-R) Amounts not converted subject to 10% early distribution penalty tax 7

8 1, 2, 7 8

9 9

10 Nondeductible Traditional IRA Assets Aggregate basis Aggregate IRA balance x Distribution amount = Amount excluded from income Assets are distributed pro rata IRA owner determines 10

11 + After-tax = Total nondeductible Traditional IRA contributions QRP rollover contributions that have not previously been excluded from income Aggregate Basis + Any = December 31 balance from prior year amounts distributed that year Aggregate IRA Balance 11

12 Pro Rata Example $15,000 nondeductible contributions $10,000 after-tax rollover from QRP Converts $20,000 in /31/17 balance $80,000 Kathy s distribution includes $5,000 of basis. Because Kathy can exclude $5,000 from income, the taxable amount of her $20,000 conversion is $15,000. $25,000 $100,000 X $20,000 = $5,000 12

13 Roth IRA Loophole No income restrictions to convert Income restrictions to contribute Traditional IRA Roth IRA Contribute and convert immediately 13

14 Recharacterizations Current-Year contribution Traditional IRA Contribution plus NIA Roth IRA (if eligible) Current-Year contribution Roth IRA Contribution plus NIA Traditional IRA (if eligible) 14

15 Conversion contribution (made in 2017) Roth IRA Retirement plan rollover (made in 2017) Contribution plus NIA Traditional IRA or SIMPLE IRA Roth IRA Rollover plus NIA Traditional IRA 15

16 All or part, plus NIA Irrevocable election Tax year does not change Recharacterization Guidelines IRA owner must notify financial organizations No constructive receipt Original reporting not corrected 16

17 Recharacterization Example Marcia made regular contributions of $300 on the 15th of each month for 2017, and she is recharacterizing $600 of these contributions on March 1, Marcia chooses which two of the contributions will be recharacterized. If she chooses the November 15 and December 15 contributions, then the computation period starts immediately before the November 15 contribution and ends immediately before the withdrawal on March 1. Marcia removes $600 plus the NIA to the contribution. 17

18 Notifying Financial Organizations

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22 R, N 22

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24 Reconversion Traditional IRA or SIMPLE IRA Conversion Roth IRA Recharacterization Reconversion 24

25 Not before the later of Conversion contribution Recharacterization X January 1 Conversion contribution Recharacterization X January 1 25

26 Reconversion Exercise Page 18 26

27 Hi, I converted my Traditional IRA to a Roth IRA on March 12, I recharacterized the amount back to a Traditional IRA on October 21,

28 Reconversion Exercise When am I eligible to complete a reconversion? November 20, 2017 December 31, 2017 January 1, 2018 Sandy must wait until January 1 of the year following the conversion. Conversion contribution Recharacterization X January 1 28

29 Reconversion Exercise If instead, I recharacterized the assets on May 21, 2018, when would I be able to reconvert? November 20, 2017 January 1, 2018 June 20, 2018 Sandy must wait until the day after the end of the 30-day period following the date of the recharacterization. Conversion contribution Recharacterization X January 1 29

30 Ineligible Conversions Traditional IRA or SIMPLE IRA Step 2: Convert remaining balance Roth IRA Step 1: Distribute RMD RMD not eligible for conversion 30

31 Failed Conversions Conversion contribution Recharacterization X January 1 Conversion contribution Recharacterization X January 1 31

32 Conversions and Recharacterizations Exercise Page

33 Conversions and Recharacterizations Exercise 1. Marcus, age 47, contributed $5,500 to his Roth IRA for He also converted $25,000 from his Traditional IRA to a Roth IRA on June 21, On December 14, 2018, he recharacterized the conversion contribution back to a Traditional IRA. What is the result of his recharacterization? 33

34 Conversions and Recharacterizations Exercise Because the tax laws no longer allow Marcus to recharacterize a conversion that occurred in 2018, he has an ineligible recharacterization. The financial organization must report the ineligible amount ($25,000) as a regular Traditional IRA contribution in Box 1 of Form Because Marcus has already contributed the limit for the year, the entire $25,000 is an excess Traditional IRA contribution. 34

35 Conversions and Recharacterizations Exercise 2. Leticia made a contribution to her Traditional IRA in 2015 that she would now like to move to her Roth IRA. Which type of transaction could she complete? Select all that apply. Transfer Rollover Conversion Recharacterization 3. Rico made a contribution to his Traditional IRA in 2018 that he would now like to move to his Roth IRA. Which type of transaction could he complete? Select all that apply. Transfer Rollover Conversion Recharacterization 35

36 Conversions and Recharacterizations Exercise 4. Sean Boswell, age 56, directly converted $67,000 from his Traditional IRA to his Roth IRA on October 17, He elected to waive withholding and closed his Traditional IRA after the conversion. On December 31, 2018, his Roth IRA balance was $74, He has no other activity in his Roth IRA. Complete his tax forms for the conversion. 36

37 X X SEAN BOSWELL 2 X 37

38 SEAN BOSWELL X 38

39 Conversions and Recharacterizations Exercise 5. Mia Toretto, age 41, contributed $5,500 to her Traditional IRA on July 7, She recharacterized the contribution, along with $2.50 in NIA, to her Roth IRA on August 9, The recharacterization did not close her Traditional IRA. On December 31, 2018, her Roth IRA balance was $12, She has no other activity in her Roth IRA. Complete her tax forms for the recharacterization. 39

40 MIA TORETTO N 40

41 MIA TORETTO X 41

42 Questions?

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