Ineligible traditional IRA rollover/ ROTH recharacterization
Both taxpayers are older than 59.5 years old so we do not have 10 percent premature distribution penalty issues.
In 2010 husband converted $ 450,000 to a ROTH. We filed extension for 2010 personal tax returns and may recharacterize 2010 conversion.
The wife withdrew $ 50,000 from her traditional IRA in November 2010 and rolled over $ 50,000 in December 2010.
Next she withdrew $ 100,000 in January 2011 and $ 180,000 in February 2011 from the same IRA and rolled over into to an IRA violating the 1 year rule so we have an IRA ineligible rollover and $ 280,000 excess contribution that I believe can be withdrawn along with earnings ( probably loss not earnings at this point) to avoid 6% excsie tax but I will own income tax on $ 280,000.
Any planning strategies?
I was thinking of recharacterizing $ 280,000 of the 2010 ROTH conversion but was unsure as to whether the $ 280,000 2011 taxable IRA incorrectly rolled into a tradional IRA could be converted to a ROTH in 2011.
Any thoughts?
Thanks
Tom Danko
Permalink Submitted by Alan Spross on Mon, 2011-08-08 21:49
No, converting excess contributions to a Roth IRA would just compound the problem.
Not sure, but it sounds like she took 3 distributions from the original IRA and rolled them over, ie 50, 100, and 180. If this is not the case, please advise.
If it IS the case, she has the option of treating the first two distributions as excess regular contributions to allow the largest 180k rollover to stand. Taxable amounts would then be 50k in 2010 and 100k in 2011. Both of them would have to be treated as excess regular contributions with separate earnings (or loss) calculations and distributed. If no earnings, taxable income would be limited to 150k. Explanatory statements would go with the 2010 and 2011 returns.
Knowing which year the taxable incomes will fall, husband could then opt to recharacterize all or part of his Roth conversion for 2010. If the conversion is now underwater that decision will be easier. He could then reconvert the amount he wants 30 days after the recharacterization, and that would be a 2011 conversion.
NOTE: If there are any serious medical conditions that can be used to establish reasonable cause, a letter ruling might be pursued for the two disallowed rollovers. There is almost no historical PLR activity that can be accessed on “one rollover limit” situations because the vast majority of them go unreported as the IRS does not know the dates of the distributions. Therefore it is difficult to know how they would rule. Rollover requests have lower IRS fees and are based on the amounts of the rollovers, but the only rulings I ever see are on the 60 day time limit, not the one rollover limit.
NOTE 2: If she discovered this back in February she could have converted the two distributions to a Roth and then recharacterized them back. Conversions do not count against the one rollover rule so this is an escape hatch but only if discovered before the funds are rolled to another TIRA. Too late to convert them now, as that would just compound the violations.
Permalink Submitted by Thomas Danko Jr on Tue, 2011-08-09 01:32
Thanks for your input.