Roth 401K Conversion to Roth IRA and then Recharacterization
I have a client that, in 2007, converted his Roth 401k to a Roth IRA and now he wants to recharacterize the RIRA to a TIRA due to declining account value. He has until mid Oct. of this year to do the recharacterization. However, are there anyother restrictions on his option to recharacterize?
Thx
Bob
Permalink Submitted by Alan Spross on Mon, 2009-03-02 23:08
Since the employer account was a designated Roth account, the transfer to a Roth IRA is not a conversion, just a direct rollover from a Roth to a Roth. There are two reasons why this rollover cannot be recharacterized:
1) These funds were not converted to a Roth as they were originally contributed to a designated Roth account. Such contributions are not eligible for recharacterization at any time, even if they were still with the employer plan. There is also no option to change a Roth IRA to a traditional IRA, other than a conversion that started with a traditional IRA.
2) And even if they were eligible, the deadline for a 2007 contribution would have been 10/15/2008.
Permalink Submitted by Robert Dyar on Tue, 2009-03-03 01:58
Alan,
Thx for prompt reply. I misstated the dates: it was a 2008 rollover to the Roth IRA and, if it were considered a conversion [which you explained it could not be] the owner would have until mid Oct. of this year for recharacterization.
Bob
Permalink Submitted by Alan Spross on Tue, 2009-03-03 02:44
Right.
Since the owner is now stuck with this Roth IRA, it is still a good idea of get a handle on the accounting composition of the Roth IRA since it now contains a rollover from a Roth 401k. The distribution from the Roth 401k would be composed of contributions and earnings, or there could be no earnings at all. In any event this balance needs to be added to his breakdown already in the Roth IRA. His contributions to the ROth 401k would be added to those made to his Roth IRA, and any earnings would be added to his Roth earnings. Starting the day after the rollover, the Roth IRA rules take over totally including the aging requirement to meet the 5 year holding period.
In this market, it would not be surprising to find that whatever earnings figure that came over from the Roth 401k may now be wiped out, since Roth IRAs that drop in value eliminate any earnings first. In summary, the new amount of his Roth IRA regular contributions should be updated, since any early distribution taken will have to be done using the ordering rules for Roth IRA non qualified distributions. This makes keeping track of these amounts a necessity to avoid a massive retroactive research job to report any Roth distribution before the Roth is fully qualified.