5 Easy Steps to a Roth IRA Recharacterization

What is a Roth IRA recharacterization?

Roth IRA recharacterizationIn the simplest of terms, a Roth IRA recharacterization is an “undo.”  It erases a Roth IRA conversion, and the conversion is treated as if it never occurred.

1.  Meet the deadline.   A Roth IRA conversion can be recharacterized until October 15 of the year after the calendar year of conversion. That means that either a January 1, 2017 or a December 31, 2017 conversion can be recharacterized through October 15, 2018. If you miss the October 15 deadline, the only way to get an extension is to go for a private letter ruling from the IRS.

Continue reading

Is a Roth conversion right for you?

Roth ConversionAre you considering a Roth conversion, but you’re unsure whether or not it’s the right move for you? A Roth IRA provides a great way to help reduce the taxes you’ll pay during retirement, but it can also increase your income during the year that you convert, which could bump you into a higher tax bracket.

When you convert funds to a Roth IRA, your pre-tax funds will be included in your income in the year of the conversion. This will increase your income for the year of the conversion, which may impact deductions, credits, exemptions, phase-outs AMT (alternative minimum tax), the taxation of your Social Security benefits and more.

Continue reading

The Roth IRA as an Emergency Fund

ROTH IRA Emergency FundA recent Pew Charitable Trusts study released in March came to the scary conclusion that roughly one-third of Americans would have trouble coming up with $2,000 in the event of an emergency. Clearly, this is a problem. Try as one might, emergencies are bound to happen from time to time. Some of them may not have an impact on your finances, but many emergencies will. With that in mind, let’s talk for a moment about the Roth IRA as an Emergency Fund

So what makes the Roth IRA such a great emergency fund? Quite simply, it has the capacity to “check all the boxes” an emergency fund should have, and then some.

Continue reading

Roth IRA Recharacterization: 11 Things You Need to Know at Tax Time

What is a recharacterization of a rollover or a conversion?

Roth IRA RecharacterizationA recharacterization allows you to “undo” or “reverse” a rollover or conversion to a Roth IRA. You generally tell the trustee of the financial institution holding your Roth IRA to transfer the amount to a traditional IRA (in a trustee-to-trustee or within the same trustee). If you do this by the due date for your tax return (including extensions), you can treat the contribution as made to the traditional IRA for that year (effectively ignoring the Roth IRA contribution).

1.  It is not too late to recharacterize a Roth IRA conversion done in 2016.

Continue reading

5 Things to Know Before Taking a Roth IRA Distribution

By Sarah Brenner, JD

IRA Analyst


Roth IRA DistributionAre you one of the growing number of savers who has a Roth IRA? If so, there will come a time when you will want to take funds from your account. Here are 5 things that every owner should know before taking a Roth IRA distribution.

1. Your Roth IRAs are treated as one account. Things can get a little tricky if you have more than one Roth IRA. When determining the taxation of a Roth IRA distribution, all of your Roth IRAs are aggregated. What does “aggregated” mean? Well, simply put, this means of your Roth IRAs are considered one account for tax purposes.

Your IRA custodian will report the distribution on Form 1099-R to you and to the IRS. You will be responsible for determining the taxation of your distribution. You will use Form 8606 to report the Roth IRA distribution on your federal tax return.

Continue reading

Rulings to Remember: The $425K IRA Mistake

Client Should Have Realized CPA Firm’s Tax Deal “To Good to be True”

Robert K and Joan L. Paschall V. Commissioner of Internal Revenue
(No. 2: Nos. 10478-08, 25825-08, Decided July 5, 2011

IRA Mistake results in taxesRobert Paschall, a married resident of California and an MIT graduate, worked for Rockwell International for his entire career until he retired in 1996.  Early in 2000, Paschall paid Grant Thorton, a national accounting firm, $120,000 for advice on his regular IRA that had a value of $1,391,942.  They presented Paschall with a plan, which he accepted, to “restructure” his regular IRA into a Roth IRA – the $425K IRA Mistake.

Under Grant Thorton’s guidance, Paschall rolled his IRA over into a self-directed traditional IRA.  He also opened a self-directed Roth IRA, funding it with $2,000, and created two corporations.  The Roth IRA purchased all the stock of one corporation for $2,000, and the traditional IRA purchased all the stock of the second corporation for close to the traditional IRA’s balance. The second corporation transferred the purchase amount (plus $120,000 paid as consideration in a merger) to the fi rst corporation.  The fi rst corporation then transferred the proceeds ($1,272,802) to the Roth IRA, which then transferred the funds into a second Roth IRA.

He was caught by IRS and got hit with penalties for excess Roth contributions, late filing and negligence penalties for multiple years.  He essentially made a $1.4 million excess contribution to a Roth IRA in a year when the contribution limit was $2,000.  The IRS assessed deficiencies against Paschall and his wife totaling more than $425,000 for tax years 2002 to 2006 for the excise tax on the excess contribution and assessed penalties of more than $103,000 for the same years for failure to file Form 5329.

In 2008, Paschall and his wife petitioned the Tax Court for relief.

What happened?

The Paschalls argued that the statute of limitation barred the assessment of the excise tax for 2002-2004, since they had filed Form 1040 for those years.  The taxpayers also argued that the penalty for Paschall’s failure to fi le Form 5329 should not apply, since his failure to file was due to reasonable cause –specifically, his reliance on the certified public accountant.

The court ruled on July 5, 2011 that the IRS was right and that it was unreasonable for Paschall to rely on the opinion of a tax advisor who was actively involved in the planning of the transaction in question and was tainted by an inherent conflict of interest.

The Paschalls owed income tax on their Roth conversion.  Interest was owed on the late tax. They owed accuracy-related penalties.  They owed failure to file penalties for not filing Form 8606.

The court stated, “Mr. Paschall should have realized that the deal was too good to be true.”  Despite his doubts during the process, Paschall never asked for advice from an independent advisor, the court said.

What you can do

If you have doubts about advice you are receiving, get a second opinion!  IRS holds the tapayer responsible for taxes, interest, and penalties.

Work with someone you trust and don’t fall for “too good to be true.”

Copyright 2016 Ed Slott and Company LLC
Photo credit: 401(K) 2013 via Foter.com / CC BY-SA

The Second Half of the Retirement Game

Are Americans Ready?

The long second half of the retirement game

Second Half of the Retirement Game

  • 69% believe there is at least some chance that they will outlive their savings.
  • 14% think they definitely will!

How to fix this? Save as much as you can as soon as you can – and if it’s getting late in your career, take advantage of the $1,000 IRA catch-up contribution. In 2016, individuals age 50+ can contribute $6,500 to their IRA. Try to move as much money as possible to tax-free territory like Roth IRAs and leverage life insurance.

Continue reading

3 Reasons to use a Roth Over a 529 Plan

Roth IRA vs 529 PlanFor some time now, the cost of a college degree has been rising at perilously high rates, and as a result, the dream of one day going to college, for many, remains just that … a dream. With college tuition and associated costs rising so dramatically, it’s no surprise that people are looking for new and creative ways to save for these expenses. One such alternative method involves the use of a Roth IRA over more traditional college savings vehicles, such as 529 plans and Coverdell education savings account. That may sound bizarre. (A 529 Plan is an education savings plan operated by a state or educational institution.) After all, why would anyone use a retirement account to save for education expenses when there are accounts specifically designed to help plan for those costs? Nevertheless, here are three reasons why it may not be as crazy as you think.

Continue reading

Leaving a Legacy: 3 Differences Between Roth IRAs and Life Insurance

Copyright Ed Slott and Company 2014 | By Jeffrey Levine, IRA Technical Expert

Roth IRA or InsuranceLife insurance and Roth IRAs have a lot in common. They are both often used as wealth transfer tools to help facilitate an efficient transfer of assets from one generation to the next, and they are both able to provide a tax-free legacy, just to name a few. Despite their many similarities, however, Roth IRAs and life insurance are very different and the rules that apply to one don’t always apply to the other. In fact, more often than not, that’s the case. Below, we discuss three differences between Roth IRAs and life insurance.

Continue reading