BPickerCPA

If you want to put new money into the traditional IRA at this time, constituting a year 2001 contribution, that is perfectly OK.

There is still no answer on the loss deductibility question. The best bet is to move the $280 ($370 less $90) in a recharacterization to a traditional IRA. You cannot add any more money to the traditional IRA. This is actually considered a contribution of $370 to the traditional IRA. Keep that in mind when you file the 8606 to report basis in a non deductible IRA (I'm assuming it's not deductible. If it is the deduction is $370). CAVEAT: I have NOT reviewed the computations. I've accepted all given numbers as correct.

I guess you can assume it, but if you do you'll be wrong.

Federal income tax withheld on a roth conversion is a disaster! It means that you did not convert 100% of the account. The withheld taxes are income, count towards the $100K limit, and is subject to the 10% early withdrawal penalty. Since you did not convert 100% of the account, you can only recharacterize what you converted. The withheld taxes will be a credit on your tax return.

Whoever you spoke to at the IRS is wrong. First of all, make sure the year of death required distribution is taken. You can then split the IRA into separate IRAs and each child can use his/her own life expectancy. The first beneficiary distribution is for 2002.

Africa, With reference to the taxability of earnings on an excess contribution, the return of the excess contribution should not be taxable, but the earnings on the excess contribution will be taxable. To restate it, if one makes an excess contribution and does not remove it, there will not be tax free distributions of income until the excess contributions AND THE RELATED INCOME is removed from the account. The income will be taxable.

It's too late to do a year 2000 Roth conversion.

Kurt, Your analysis is correct. I have successfully obtained permission from the IRS for a late recharacterization. This is done via a request for a private letter ruling. According to the people at the IRS, your chances for the relief decreases significantly if they come to you before you come to them.

You're still eligible.

You are NOT reading it correctly. The new proposed regs have made NO CHANGE to any required beginning date. If you wait until first quarter of the year after the year you attain age 70½, you will have to double up in that year.

The law is that you are penalized 6% PER YEAR, from the year you make the excess contribution until the year you remove it. The penalty is not a "fee" to keep the money in a Roth; it's a PENALTY designed to get you to correct an improper behavior. You should know that you also have to remove the applicable income on the contribution, and the income is taxed and subject to the 10% early withdrawal penalty. You also will never be eligible to take tax free income from the Roth until you correct the excess contributions.

The deadline for recharacterizing a year 2000 conversion is 10/15/2001. Any audit would take place after that date, I presume. You would therefore need special IRS permission to do a recharacterization. Whether they would grant it would depend greatly on the circumstances that caused the audit to bring your income over $100K. If the recharacterization was permitted, there would be no penalty and you would get your taxes on the conversion refunded. If the recharacterization was not permitted you would owe 10% tax on the early withdrawal of the IRA, you would have to remove all the money from the roth and could not put it back into an IRA so you have no retirement account, and you would owe 6% per year penalty for excess contribution to the roth until the money was withdrawn. All in all, not a pretty picture.

He can contribute the total wages, which is the gross amount. Hope this helps.

Besides the point about the taxpayer coming forward, there was also some stuff about the complicated rules, the taxpayer didn't know, their accountant didn't tell them, etc. Basically the stuff we said to the Service in the request.

We have received, on behalf of a client, a positive letter ruling from the IRS that permits the client to do a late recharacterization of their improper 1998 conversion. A key factor in the discussion was that the request was made prior to the IRS coming after the taxpayer. This concurs with my previous discussions with the IRS that they would be more lenient with taxpayers who voluntarily come forward rather than wait for the IRS to come to them. Has anyone heard of the IRS contacting a taxpayer on an improper conversion since the 12/31/99 recharacterization deadline? I'm wondering if the IRS is trying to give taxpayers as much time as possible before they take action.

You can always move your IRA account to another custodian. The IRA must be in the control of an IRS recognized custodian, but most brokers allow you to control your own investments. If the mutual fund that your IRA is invested in is proprietary to the broker, then you would have to sell the fund within the IRA with the broker, and then you could do a trustee to trustee of the cash to another custodian. Do not take actual possession of the funds. Only transfer it in trustee to trustee transfers. If you know where you want to move the IRA account to, go there first to open the account and they will help you with the transfer. Good luck.

Mary, That's an interesting statement about not being able to disclaim if one has taken the decedent's year of death MRD. I'm writing a book on retirement plans and the new rules, and I addressed this question in the book. Originally I took the position that you mentioned, but rethought it. I now believe that since PARTIAL disclaimers are permitted, one could take the year of death MRD, and disclaim the balance of the account, as long as no other actions were taken to indicate acceptance of the account. I believe that it's analogous to the situation where you were left a $100,000 bequest in the will. The executor gives you a check for $10,000 which you accept. I believe you can still disclaim the other $90,000. Do you have specific cites for your position? I looked at the examples in the regs. NOne are on point (are they ever?) but some are close enough to make me think I'm right.

After the expense of a PLR, probably.

If account holder dies in 1999 and would have been 70½ in 2000, the fact that spouse takes a distribution in 2000 is not by itself considered an "election" to be a beneficiary. After all, if spouse is over 59½, she can take a distribution with no consequence. My recollection is that there is some IRS ruling that once you've treated the IRA as a beneficiary you cannot roll it over. I'm not sure how valid that ruling is now. But the circumstance of that ruling was that the spouse was under 59½ so that being a beneficiary was the only way to avoid the 10% penalty. But there is no deadline, per se.

Disclaimers must be made within 9 months of death.

The election that KJohnson is referring to is the election to treat the decedent's IRA as his/her own. That is different than a rollover when the spouse moves the assets of the decedent's IRA into his or her own. The end result is the same, the mechanism. Even if you cannot make the election, you can do a rollover, for example an IRA left 50% to a spouse and 50% to a child.

John, Qualified plans have provisions that you cannot take an in service distribution except for "hardship". Many people mistakenly assume this excuses the 10% early withdrawal penalty; it does not. There is also no such concept in IRA-dom.

Mary, I have to say that the answer is no. You cannot get a designated beneficiary by assigning an interest from an estate. If the spouse is an estate beneficiary, you might get a favorable ruling that the IRA can be paid to the estate, then paid to the spouse, and then the spouse can do a spousal rollover. This is a facts and circumstances question, and I would never advise doing this without a ruling from the IRS. Keep in mind that the new regs allow the IRA to be paid out over the remaining years in the decedent's life expectancy (if death is after the RBD), so if you pay it out without the ruling, and the IRS says no to the rollover, you've prematurely killed the IRA.

John, I agree in part and disagree in part. What I heard from the people in Washington is that the old rules still apply. That means you can get your PLR to do a spousal rollover if the spouse had "complete dominion and control". But that is not the same as a trustee making a distribution to the spouse. I do not recall any PLRs where an independent trustee made a distribution through the trust to the spouse and the spouse was permitted a rollover. The regs do refer to the election to treat an inherited IRA as one's own. That's what is confusing people.

I disagree with the above. It's possible for there to be a DEEMED election under certain circumstances but there technically is no deadline for making the election or doing a rollover. For example, if the decedent was 55 and the wife was the same age, she can sit with the IRA and not do anything, and later elect to treat it as her own.