Slott Report Mailbag: Can I Recharacterize AGAIN?

Thursday, April 03, 2014

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

You can’t just contribute to an IRA if you have extra money lying around and don’t work. It’s a fact that many Americans aren’t aware of, and it’s one that came up in this week’s Slott Report Mailbag. We also examine the ability to recharacterize part of a Roth conversion more than once and the process for establishing IRA annuities. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

I converted a regular IRA into a Roth IRA. When doing my tax return, I found that this put me into a higher tax bracket so I recharacterized part of the conversion to what I thought put my taxable income back into the lower tax bracket. However, I now find that the amount I recharacterized was not large enough. Can I recharacterize some more of the conversion to get my taxable income low enough to put me in the lower tax bracket?

Answer:
Yes. There is no limit on the number of recharacterizations that you can do. You can recharacterize some or all of the remaining conversion amount back to an IRA. You must attach a note to your federal income tax return to explain the recharacterizations.

2.

I’m 54 and collecting disability and a small pension. I have a rollover IRA for which I’ve been told that I can not add any money to unless it is “earned income.” Is this a true statement and if so are there any workarounds?

Answer:
You must have earned income (compensation) from working to be able to make an IRA contribution for the year. Disability income and pension income are not considered compensation, so you can’t make an IRA contribution based on those amounts.

3.

Ed:

I am considering purchasing several annuities with the money in my SEP IRA. I want to keep the annuities in my IRA. Can I do this? I do not want this to be considered a distribution of the money and therefore cause a major tax problem. Would very much appreciate your direction in this matter.

Thank you,

Paula

Answer:
You can invest your SEP IRA funds in a variety of investments, including annuities. Simply find a financial institution that offers IRA annuities (sometimes called qualified annuities) and transfer your IRA funds to that IRA annuity. An important point to keep in mind is that your IRA must purchase the annuity.

 

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