txdd

Would this really work? I thought that, when a surviving spouse rolled over a 401k into an IRA, the IRA would be in the spouse's name --- not like an inherited IRA. In that case, the spouse would have to start taking MRD's based on the spouse's age. Don't know about the year of rollover though.

The taxpayer might want to reconsider his decision not to recharacterize to a traditional IRA. If he does not already have a traditional IRA, then the recharacterized contribution would give him a $700 balance with a $2000 basis. If left as his sole traditional IRA, it can grow by almost 200% before any withdrawal becomes taxable. This is almost as good as a Roth. Even if the TP has other traditional IRA's, recharacterizing would decrease his ultimate taxable income by $1300 since his tax free basis would go up by $2000. Either outcome would seem to be a better deal than withdrawal since, as James pointed out, it's unlikely he will be able to deduct his loss.

I think there's still some misunderstanding. An inherited IRA cannot last past the (non-spouse) beneficiary's original life expectancy. The divisor is reduced by 1 every subsequent distribution year so it eventually gets to be 1 or less. For instance, if the beneficiary's life expectancy is 32 years in the first distribution year (MRD = 1/32 of balance), the MRD will be the entire (previous Dec 31) balance in the 32nd year. Of course any beneficiary, regardless of age, can die before the final distribution.

Barry, Can't Jim recharacterize his Roth contribution as traditional IRA and deduct the original $2000? I thought the fact that his earnings were negative would not affect the contribution amount, i.e. that the full $2000 would be considered as having been contributed to the tradional IRA.

It is my understanding that a spouse may treat an inherited IRA as his or her own so I think it would be OK for the Roth conversion to be directly from the inherited IRA (now considered the spouse's own). If the conversion were to be recharacterized, the finds would simply go into an IRA belonging to the spouse, never back to inherited status.

Appleby, So would you agree that the wording in Pub 590 is misleading (dead wrong ???) for spouse beneficiaries? I know IRS publications are not the final word on anything, but it would still be nice if they had the correct info.

A Simple IRA for a sole proprietor does not require a federal tax id.

It appears to me that the new Pub 590 has a fairly significant error in it regarding the new RMD rules. On page 30 near the bottom of the second column, it states that all beneficiaries should reduce their life expectancy by 1 for each year after the first distribution year. My understanding is that a sole beneficiary surviving spouse would use his or her current age to determine life expectancy in each year. Which is correct? If my interpretation is proper, wouldn't this error be significant enough to require a corrected reissue of Pub 590?

Assuming you meet eligibility, you and your spouse can establish Roth IRA's for yourselves AND educational IRA's for your children. You cannot, however, establish Roth IRA's for your children unless they have earned income.

If you have made any regular Roth contributions, you can withdraw those without tax or penalty. After that, withdrawal of your 1998 conversion would be subject to the 10% early distribution penalty since 5 years has not elapsed. Also, you still must report the last quarter of the 1998 conversion in 2001 income.

It seems like the best action is to recharacterize your Roth contributions (with earnings) as traditional IRA contributions before the 10/15 deadline. You would then file amended returns showing your (probably) non-deductible contributions on Form 8606. I think that this would relieve you of any tax or penalty.