Am I Violating the 30-Day Waiting Period for Reconverting Recharacterizted Funds?

By Sarah Brenner and Beverly DeVeny
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With the Roth recharacterization deadline approaching (October 15), this week’s Slott Report Mailbag answers a great question about the 30-day waiting period on reconverting funds after a recharacterization and further clarifies a reader’s question on utilizing the stretch IRA. As always, we recommend that you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
 

1.

Dear Mr. Slott:

Suppose in 2014, I convert a traditional IRA to a Roth containing an emerging markets mutual fund (with a value of, say, $10,000).

In September 2015, I recharacterize the conversion when the mutual fund is worth only $9,000.

Suppose I also have a traditional 403(b) account containing the same emerging markets mutual fund. Assume that either immediately after or immediately before the recharacterization of my Roth IRA account, I convert $9,000 of my emerging markets 403(b) to a Roth IRA (either with or without a transitional one-day traditional IRA).

Do I violate the Internal Revenue Code’s 30-day waiting period on reconverting after a recharacterization? Technically, I have not reconverted the recharacterized account, but converted a different account; although that other account contains the same mutual fund and the amount converted of the other account is identical to the value of the recharacterized account.

Gratefully,

William Wang  

Answer:
Good news! The rules say that when you convert funds to a Roth IRA and then recharacterize the funds back to a traditional IRA, you must wait until the later of the taxable year following the conversion or thirty days after the recharacterization to reconvert those same funds. You do not convert the same funds when you convert your 403(b) after previously converting your traditional IRA, so this rule does not apply to you in this situation. This is true even though both your traditional IRA and 403(b) account happened to contain investments in the same mutual fund.

2.

In a recent article, Sarah Brenner explained that Michael could stretch the IRA inherited from his father over his own lifetime, but Michael’s son had to stretch the IRA he inherits from his father over his father’s lifetime.  Why not over his own lifetime, ad infinitum?

Frank Ward

Answer:
The rules allow beneficiaries to stretch RMDs from inherited IRAs, but you can only stretch so far! When Michael inherits his father’s IRA, he may stretch RMDs from the inherited IRA over his own life expectancy. He may name his son as his successor beneficiary. If Michael dies, his son, as a successor beneficiary, may continue to take RMDs from the inherited IRA over Michael’s life expectancy. The son may not use his own life expectancy. He is limited to using the life expectancy of Michael, who was the original designated beneficiary on the IRA.