Retirement
Plans Quarterly
2010 EXTENSION FOR TAX-FREE IRA DISTRIBUTIONS TO CHARITIES STILL NOT PASSED
During the latter part of June, the Senate rejected H.R. 4213 (American Jobs and Closing Tax Loopholes
Act), which among other legislation, extended the option for IRA holders age 70 ½ and older to donate
up to $100,000 from their IRAs to qualifying charities tax-free through December 31, 2010. Since then,
the bill was pulled from the floor and a scaled-down version of H.R. 4213 (Unemployment Compensation
Extension Act of 2010) was passed by the Senate and signed into law by President Obama. However, this
legislation did not extend many of the popular tax breaks of the Tax Extenders Act, and it is unclear at this
time whether they will be considered later in 2010. Watch for updates to follow.
DEADLINE TO RECHARACTERIZE
After an IRA is converted to a Roth, there may be situations where the individual wants to reverse the conver-
sion. For example, a tax-filer that converts a Traditional IRA to a Roth and later discovers he or she is above
the eligibility income level (a 2009 Roth IRA conversion), or the market value of converted securities has
decreased in value. The individual may choose to recharacterize (reverse) the conversion back to a Traditional
IRA and without taxation or penalty. Special rules provide relief to taxpayers that reverse (recharacterize)
conversions to Roth IRAs.
Recharacterization example
To see how a reversal could benefit a taxpayer, let’s assume he or she converted securities valued at $100,000.
Since the conversion, the market value of the securities decreased to $75,000. The taxpayer will have to
include $100,000 as ordinary income received (converted) on securities now valued at $25,000 less. How-
ever, if that same taxpayer reverses the conversion, no tax will be due at that time. The IRA holder will have
another opportunity to reconvert later at the lower value, which means less ordinary income tax to pay. For
tax-filers that reverse a conversion back to a Traditional IRA, a reconversion may only occur the later of:
January 1 of the tax year following the conversion, or 30 days after the recharacterization (reversal).
Recharacterization between IRAs
In addition to reversing conversions, the IRS allows taxpayers that contribute to either a Traditional or Roth
IRA the opportunity to recharacterize (move) that contribution (plus earnings or less the loss) to the other
type of IRA. This may be a good strategy for someone who discovers their Traditional IRA is not deductible
and therefore elects to make it a Roth IRA contribution or someone who discovers they exceeded the income
limit for Roth contribution eligibility and therefore elects to make it a non-deductible Traditional IRA. Note
that in order to move a Traditional IRA contribution to a Roth IRA, the taxpayer’s AGI must be under the
allowable limits for the year the contribution is intended ($120,000 for a single filer and $177,000 for married
couples filing a joint return for 2010). However, there are no AGI limits for non-deductible contributions to
Traditional IRAs, and therefore, taxpayers may recharacterize Roth contributions to a Traditional IRA.
Deadline
Note that to qualify for a recharacterization of contributions between IRAs, the reversal must be completed
prior to October 15 of the year following the year the contribution was made and the individual must have
filed their Federal income tax return by the normal filing deadline, plus extensions. So, for 2009 conversions
and contributions, the deadline is quickly approaching.
Recharacterization steps:
1. Inform the custodian to complete a transfer of the original contribution/conversion amount from one IRA
to another. The transfer must include any net income (or loss) from the original date of the contribution,
which the custodian will calculate.
2. Report the recharacterization with the IRA holder’s tax return on Form 8606 using the date of the origi-
nal contribution. The individual may have to amend their return if the recharacterization is for a previous
year’s contribution/conversion.
3. Custodian will issue a form 1099-R and the amount for the changed IRA on Form 5498.
Individuals should consider this as an opportunity to take advantage of the flexibility of being able to rechar-
acterize/reverse their ineligible IRA contribution or underperforming Roth IRA conversion. Remember, a
recharacterization must occur before tax filing deadline plus extension (October 15). It is always recommended
that individuals seek the aid of a competent tax advisor or tax attorney to assist with tax advice and guidance.
3rd Quarter 2010