Recharacterication of Roth IRA and Form 1040X

[Guest benefits8]

I did a Roth Conversion in Dec 2001 while I was with Broker ABC (consisting of 6 mutual funds + $200 in Money Market Fund).

In Feb 2002, I put in $2K for 2001 Roth contribution (in Money Market Fund) -- in the same Roth account.

Then I transfer the entire Roth account to Broker XYZ (trustee-to-trustee).

I file my 2001 tax return in 4/2002 with no extension. Now I would like to recharacterize both the 2001 Roth Conversion ($10K value at time of conversion) and 2001 Contribution ($2K). The current market value is $8K.

What number do I put down on Line 1 of Form 1040X -- minus $12K ?? And what details do I need to put in "Explanation of Changes to Income"?

Smit

[Guest Taxman]

benefits8

Unless you request relief under IRC Reg. Sec. 301.9100-3, you cannot recharacterize the contribution/conversion at this date.

The recharacterization must take place via a trustee-to-trustee transfer of the funds no later than the due date, including extensions, for the income tax return for the year in question.

Therefore, since you did not extend your 2001 tax return, any recharacterizations that you could have done had to be done by April 15, 2002. Had you extended your return initially, you would have had until August 15, 2002. Had you extended your return a second time, you would have had until October 15, 2002.

Also, it isn't just as easy as filing a 1040X for the year in question. Even if you could recharacterize your contributions/conversion at this date, you need to inform the trustee who holds the funds in an account designated as a Roth IRA. Were you to attempt such a recharacterization now with the trustee, they would inform you that such a transaction cannot take place at this point (at least they hopefully would do so).

Sorry, but hope the info is helpful.

[Guest benefits8]

Originally posted by Taxman

benefits8

Unless you request relief under IRC Reg. Sec. 301.9100-3, you cannot recharacterize the contribution/conversion at this date.

The recharacterization must take place via a trustee-to-trustee transfer of the funds no later than the due date, including extensions, for the income tax return for the year in question.

Some one suggested that one can file a 1040X and write 'Filed pursuant to section 301.9100-2' on the return.

Also, it isn't just as easy as filing a 1040X for the year in question.  Even if you could recharacterize your contributions/conversion at this date, you need to inform the trustee who holds the funds in an account designated as a Roth IRA.  Were you to attempt such a recharacterization now with the trustee, they would inform you that such a transaction cannot take place at this point (at least they hopefully would do so).

I did asked the brokerage firm. They said I have to tell them what to recharacterize. May be they didn't pay attention to my statement about my conversion was before the transfer of my account to them.

[Guest Taxman]

benefits8

I think you may have received bad advice, which occurs when so many differing types of people practice in the employee benefit area, which in reality is Internal Revenue Code, supplemented by requirements of Federal law (i.e. ERISA).

The Regs. that we are discussing in the instant case are not IRC Reg. Sec. 301.9100-2. Those Regs. allow an AUTOMATIC 6-month extension on regulatory or administrative elections for the following: 1) election to use fiscal year under Sec. 444, 2) election to use LIFO method under Sec. 472, 3) the 15-month rule for filing exemption applications under certain Sec. 501© orgs, 4) 15-month rule for filing exemption application for Sec. 501©(3) orgs, 5) election to be treated as a HOA under Sec. 528, 6) the election to adjust basis on phsip transfers and distributions under Sec. 754, 7) the estate tax election for specially valued property under Sec. 2032A(d)(1), 8) the gift tax election for payment rights under Sec. 2701©(3)©(i), and 9) the gift tax election regarding distribution rightws under Sec. 2701©(3)©(ii).

READ: this Reg. Sec. does not apply.............................

Requests for extensions of time for elections that are not contained in IRC Reg. Sec. 301.9100-2 MUST be made under the rules of Sec. 301.9100-3. Pursuant to IRC Reg. Sec. 301.9100-3(e)(5) "A request for relief under this section is a request for a letter ruling. Request for relief should be submitted in accordance with the applicable procedures for requests for a letter ruling and must be accompanied by the applicable user fee."

Whoever gave you the 1040-X advice was not familiar with the applicable regulations. Relief may indeed be granted, but you must request a PLR under the correct regulation.

And forget what I said about the custodian, only the most astute person would catch your errors. Custodians tend to have 21 year old college students handling their customer service phones (who have just passed the Series 7), so they won't catch anything except the most egregious violations.

Sorry to burst your bubble, I am always on the side of the taxpayer (I am a CPA), but there is just no way you can do this is accordance your way and be within the rules. Now whether you could do it and not get caught is a whole other question that I can't comment on....

[mbozek]

Without getting into the nuances of who is right on this issue I suggest that Benefits 8 get a copy of IRS Pub 590 and look at the deadlines for conversions and reconversions (around P 40). I recollect that for years prior to 2001 the IRS had allowed one conversion/reconversion of a Roth IRA per tax year and permitted recharacterization as late as 6 months after the dute date for filing the return ( e.g., 10/15) even if the income tax return had been filed for the tax year. Ann 99-104. Also see instructions for IRS form 8606, P1. The pub and 8606 form should be available on IRS web site. I am not reviewing the issue of whether Benefits 8 can make a conversion or whether the such conversion is feasible. I am just suggesting that he/she review the IRS materials on when conversion is permissible.

[Guest Taxman]

There is no disagreement as to whether it can be done. It indeed can, through a PLR though, not through filing a 1040X with the incorrect Reg. citation on it.

The instructions and any announcements will reinforce this position, i.e. it can be done easily, using the proper procedures (requesting a PLR).

[BPickerCPA]

The deadline for recharacterizing a year 2001 conversion is OCTOBER 15, 2002, as long as the 2001 is timely filed, including extensions. No one needs to get a PLR at this time; the extension until October 15th is AUTOMATIC.

As far as the 1040X is concerned, the important thing is that you are canceling the conversion income, and, if otherwise eligible, you are adding a deduction for an IRA contribution. If not eligible for the deduction, you need a form 8606 to show the non deductible IRA contribution.

As an aside, it doesn't pay to recharacterize the contribution unless you are getting a deduction for it, and even then there may be some debate on the advisability of it.

[John G]

Adding to Barry's coment above: It looks like you may have seen a $2k reduction in valuation in the IRA converted to Roth. The maximum short term tax savings can be readily calculated by multipling that number by your tax rate. Lets assume that you would save about $800 on state a federal. That is not a $800 gift. Subtract any fees that you will be charge by the custodian and your accountant. Then recognize that you may not have the option to convert in future years for a variety of reasons. You are also losing the future tax free status of that approximatley 8k that would be in the Roth. (I would not do anything with the contribution) You are going to need to spend time to write letters of instruction and follow-up to make sure everything is done. Is it worthwhile? If you value your time very much, the answer maybe no.

If yes, then you really need to hustle to get all of this done in a timely fashion. These kinds of transactions don't get a lot of priority by custodians and they often are done wrong. You will need to spend some time tracking the activity. Do not assume that this can be completed in two weeks.

You conversion timing may have been off, but it is far from a disaster.

[mbozek]

IRS pub 590, P 54 col 1, states that a taxpayer can recharacterize by filing an amended return within 6 months of the due date by reporting the recharacterization on the amended return and writing "filed pursuant to section 301.9100-2 "on the return.