Re-characterization?
I have a client who had funds in an old 401k from past employer who then started a Fixed Index annuity and rolled over the funds and then converted the funds to Roth IRA. Their accountant now says you shouldnt have done that because of obama care costs. We were hoping to have the carrier internally be able to do it, however, they are not able to, then, because the funds came from a former employer 401k which we know they will not take the funds back we were then told by the carrier the client could “free-look” the annuity and they would send a check directly to the client but are unable to change it back to IRA or 401k funds. If we get the carrier to send the funds back to the client and it shows roth conversion on there is there a way to do it so its not going to be a taxable event to them? They have not paid taxes on this yet, it was started in Dec of 2024 but the annuity contract was issued on Jan 15th 2025
Please advise,
Thanks
Permalink Submitted by Alan - IRA critic on Wed, 2025-03-05 15:15
They may be able to have the annuity cancelled, but not the conversion since Roth conversions can no longer be recharacterized. There is no way to return the funds to a pre tax IRA. The 1099R will have to be reported as issued.
If the annuity is cancelled and a check issued, the client needs to qualify for a 60 day rollover to another Roth IRA, as only one such rollover is allowed over a 12 month period. If that rollover has been used, the funds can only be moved by direct transfer. This should be considered before seeking to have the annuity cancelled.