Recharacterization requested after IRA to IRA transfer?

[Guest amfam2]

Cust establishes new Roth IRA, contributes $850, then closes it and transfers the $850 (plus earnings) into another Roth IRA.

Customer wants to recharacterize the $850 into a Trad IRA contribution.

The regs say that IRA transfers cannot be recharacterized (1.408A-5 Q & A 10). But then again, it says that you can disregard transfer and recharacterize the amounts as if they were contributed under the first Roth IRA.

Can they or can't they, and please explain why.... finding these rules really, really mind bending...

[Appleby]

The actual transfer transaction cannot be recharacterized. For instance, you are not able to say, I want to treat my trustee-to-trustee transfer as if it was transferred to my traditional IRA instead of my Roth IRA. However, in your example, the customer would not be recharacterizing the transfer, he/she would be recharacterizing the contribution. It appears that the entire Roth IRA balance if from the $850 plus earnings. If this is so, then the customer would simply instruct the current custodian to recharacterize the entire account balance. If the Roth IRA has assets from other contribution or conversions, the applicable earnings must be computed, and the recharacterization amount would be the contribution plus earnings (or minus any loss). Some IRA custodians assist the IRA owner with the calculation- custodian are not required to do so- of those that will do the calculation, most will not if the contribution was made to the IRA while it was being held at another custodian. The regs for computing the earnings are at http://www.irs.gov/pub/irs-regs/td9056.pdf

The customer may also want to check with the custodian regarding required paperwork for effecting the recharacterization