Can I Recharacterize Funds Rolled Over From an Employer Retirement Plan to a Roth IRA?

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag looks at IRA trust beneficiary maneuvers and how to disclaim yourself as an IRA beneficiary. As always, we recommend 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.

Ed,

My 89-year-old mother died this year with an IRA worth about $100,000. She named her trust as the beneficiary of the IRA.

The trust calls for the four of us children to split everything equally and then shut down. My research indicates we qualify as “pass through” beneficiaries and the IRA can be split up into four inherited IRA’s.

My question, can we split the IRA up into four “Inherited IRA’s” and then use the five-year rule since the trust was the designated beneficiary?

Bob Hobbs

Answer:
Assuming the trust qualifies as a see-through trust, the five-year rule does not apply. All four children could use the single life expectancy of the oldest child. The trust can assign the inherited IRA out of the trust to each beneficiary of the trust. This should only be done via a direct trustee-to-trustee transfer from the inherited IRA for the trust to an inherited IRA for each child. Some IRA custodians may be unwilling to do this without a private letter ruling from IRS. Ideally, you should also check with a trust attorney to make sure everything is in order.

2.

When I retired from the Federal Government in 2012, I rolled over my Voluntary Contributions into a traditional IRA. However there was no 1099-R given by the Government. How do I report the rollover? Do I need to generate and submit my own 1099-R? The distribution was in 2012. Do I need to amend my 2012 tax form to show the distribution? To complicate matters, my advisor rolled over both the after-tax contributions and pre-tax earnings into a traditional IRA. We are recharacterizing the after-tax contributions to a Roth IRA in 2013.

Thank you for any info.

Judy Hampton

Answer:
Assuming the funds were rollover eligible, a Form 1099-R should have been issued. You then should have reported the distribution on your 2012 federal income tax return (Form 1040) and reported it as a nontaxable rollover. You cannot recharacterize funds rolled from an employer plan to a Roth IRA. You can only convert them. Now that the funds are in an IRA, you cannot generally convert just the after-tax funds to a Roth IRA tax-free. The pro-rata tax rule applies so part of the conversion will be tax-free and part will be taxable. Form 8606 will also need to be filed with your amended 2012 tax return to reflect the after-tax amounts that went into your IRA. You should talk with a qualified tax-preparer about amending your 2012 tax return.

3.

My father, age 92, has four kids and will split his IRA and money in four equal parts. I am one of the four, and do not need the money, but would like my siblings to refuse their IRA portion so I may pass it on to my kids. How do I do this?

Answer:
You cannot do what you want without your father’s cooperation. Your father would have to name new beneficiaries on the IRA beneficiary form. When those beneficiaries are properly named, you can disclaim your share of your inheritance and it will automatically go to your children without any action on the part of your siblings. You may also want to discuss changing beneficiaries with your siblings so there are no unpleasant surprises or family discord after your father’s death. A disclaimer is a legal document and we recommend that you consult with an attorney before disclaiming any part of your inheritance.