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October–Think “Recharacterization Deadline”

Is it too late to recharacterize a Roth conversion for 2016?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in New Jersey is representative of a common inquiry involving recharacterizations.

Highlights of discussions

A 2016 conversion to a Roth IRA, generally, can be undone (“recharacterized”) as late as October 16, 2017 [IRC Sec. 408A(d)(6)].  However, if your client completed a conversion of 401(k) assets to a designated Roth account within the 401(k) plan (rather than to an external Roth IRA), he or she would not be able to recharacterize the in-plan conversion, regardless of when the conversion occurred (IRS Notice 2010-84, Q&A 6.)

The IRS will allow taxpayers to recharacterize an unwanted Roth IRA conversion for any reason without tax or penalty as long as it is done by the deadline, which is generally October 15th of the year following the year of conversion. (If the time for completing the rechacterization falls on a Saturday, Sunday or legal holiday, the deadline becomes the next businesses day. October 15, 2017, is a Sunday, so the deadline becomes the 16th IRC Sec. 7503.)

The recharacterization timeframe is connected to when your client filed his or her tax return. For a conversion to a Roth IRA completed in 2016, if your client filed his or her 2016 tax return on time (i.e., by April 17, 2017) he or she could recharacterize the unwanted conversion without tax or penalty at any time up to October 16, 2017. Of course, he or she would have to properly amend the 2016 tax return to reflect the recharacterization.

For a conversion completed in 2017, if your client files his or her 2017 tax return on time (i.e., by April 16, 2018) the individual would have until October 15, 2018, to recharacterize the unwanted conversion without tax or penalty.

To accomplish a recharacterization, your client would need to transfer the converted amount, along with any gains or losses, back to a traditional IRA within the prescribed IRS timeframe. Even in the case of a qualified plan-to-Roth IRA conversion, the rechacterization must go to a traditional IRA; it cannot go back to the original qualified plan (Treasury Regulation 1.408A-4, Q&A 3 and IRS Notice 2008-30, Q&A 5).

Following a recharacterization, your client has the option to “reconvert” a similar amount to a Roth IRA after satisfying the required waiting period for a “reconversion.” The required waiting period ends on the date that is the later of

  • 30 days after the recharacterization or
  • January 1 of the year following the conversion

EXAMPLE:

Thom converted a portion of his 401(k) plan assets in 2016 to a Roth IRA. He filed his 2016 tax return timely on April 17, 2017. Thom elects to recharacterize his 2016 Roth IRA conversion to a traditional IRA by October 16, 2017, and amends his 2016 tax return. The soonest Thom could reconvert a similar amount would be November 15, 2017.

As a rule of thumb, if a client converts and recharacterizes in the same year, he or she must wait until the following year to reconvert.

Conclusion

The IRS’ Roth IRA conversion/recharacterization/reconversion rules give taxpayers a great deal of flexibility if the proper process steps are completed within the set deadlines. Clients who are contemplating any of the three actions should carefully discuss them with their tax advisors.

© Copyright 2017 Retirement Learning Center, all rights reserved
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Waiver of the 60-Day Rollover Time Limit

“My client has heard there is a way to obtain a waiver of the 60-day rollover time limit. Can you provide the requirements?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Maryland is representative of a common inquiry involving rollovers.

Highlights of discussion

Yes, in fact, there are three ways a recipient of an eligible rollover distribution from an IRA or qualified retirement plan may obtain a waiver of the requirement to roll over the distribution within 60 days in order to avoid tax consequences. Your client may obtain a waiver by: 1) qualifying for an automatic waiver; 2) requesting and receiving a private letter ruling granting a waiver; or 3) self-certifying that he or she meets the requirements of a waiver, and the IRS determines during an audit of your client’s income tax return that he or she does qualify for a waiver.

Internal Revenue Code Sections (IRC §§) 402(c)(3) and 408(d)(3) provide that any amount distributed from a qualified plan or IRA will be excluded from income if it is transferred to an eligible retirement plan no later than the 60th day following the day of receipt. A similar rule applies to IRC §403(a) annuity plans, IRC §403(b) tax sheltered annuities, and IRC §457(b) eligible governmental plans [please see §§ 403(a)(4)(B), 403(b)(8)(B), and 457(e)(16)(B)].

The automatic waiver comes into play when the failure to complete the rollover timely results from an error made by the receiving financial organization. In order to qualify, all of the following must be satisfied:

1. The financial organization received the funds before the end of the 60-day rollover period;

2.  The individual followed all of the procedures set by the financial organization for depositing the funds into an IRA or other eligible retirement plan within the 60-day rollover period (including giving instructions to deposit the funds into a plan or IRA);

3.The funds were not deposited into a plan or IRA within the 60-day rollover period solely because of an error on the part of the financial organization;

4. The funds are deposited into a plan or IRA within one year from the beginning of the 60-day rollover period; and

5. It would have been a valid rollover if the financial organization had deposited the funds as instructed.

Your client could apply for a 60-day rollover waiver by requesting a private letter ruling (PLR) from the IRS according to the procedures outlined in Revenue Procedure 2003-16 and Revenue Procedure 2017-4. Note that an IRS user fee of $10,000 applies to the request. The IRS will issue a PLR waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer.

Finally, your client may be able to “self certify” that he or she qualifies for the waiver if all of the following are true:

  • Your client presents a letter (a model is included in Revenue Procedure 2016-47) to the receiving financial organization that certifies the late rollover is eligible for the waiver;
  • The rollover contribution is, otherwise, a valid rollover (except the 60-day deposit requirement);
  • Your client can demonstrate that one or more of the 11 approved reasons listed in Revenue Procedure 2016-47 prevented him or her from completing a rollover before the expiration of the 60-day period (e.g., the distribution was deposited into an account that your client mistakenly thought was a retirement plan or IRA);
  • The distribution came from your client’s IRA or retirement plan;
  • The IRS has not previously denied a request for a waiver (see previous bullet);
  • The rollover contribution is made to an eligible plan or IRA as soon as possible (usually within 30 days) after the reason for the delay no longer prevents the individual from making the contribution; and
  • The representations the individual makes in the certification letter are true.

Conclusion

The IRS has provided three potential ways to obtain a waiver of the 60-day rollover time limit. Distribution recipients should carefully consider which may be most appropriate for their situations.

 

© Copyright 2017 Retirement Learning Center, all rights reserved
IRA
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Setting Up a SIMPLE IRA Plan

“My client and I want to know if there is a deadline for establishing a SIMPLE IRA plan for 2017?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in New Mexico is representative of a common inquiry involving savings incentive match plans for employees (SIMPLE) IRA plans.

Highlights of discussion

  • Yes, there is. The general deadline for establishing a SIMPLE IRA plan for a given year is October 1. For example, the deadline for an eligible business owner to set up a SIMPLE IRA plan for 2017 is October 1, 2017.
  • There are two exceptions to the general rule. First, if the business comes into existence after October 1 of the year the SIMPLE IRA plan is desired, then the new business owner may still set up a SIMPLE IRA plan for the year, provided he or she does so as soon as administratively feasible after the start of the new business. Second, if a business has previously maintained a SIMPLE IRA plan, then it may only set up a new SIMPLE IRA plan effective on January 1 of the following year (e.g., set up the plan in 2017 with an effective date of January 1, 2018).
  • Businesses that are eligible to establish SIMPLE IRA plans are those that
  1. Do not maintain any other qualified retirement plans; and
  2. Have 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding year [IRC §408(p)(2)(c)(i) IRC §408(p)(2)(c)(i) and IRS Notice 98-4, Q&A B4 ].
  • The basic steps for establishing a SIMPLE IRA plan are
  1. Execute a written plan document (either a government Form 5304-SIMPLE or Form 5305-SIMPLE, or a prototype plan document from a mutual fund company, insurance company, bank or other qualified institution);
  2. Provide notice to employees; and
  3. Ensure each participant sets up a SIMPLE IRA to receive contributions.
  • Employees who are eligible to participate in a SIMPLE IRA plan are those who received at least $5,000 in compensation from the employer during any two preceding years, and are reasonably expected to receive at least $5,000 in compensation during the current year.Business owners who are interested in establishing SIMPLE IRA plans must be aware of the deadline to do so, and the additional steps involved to ensure a successful set up.

Conclusion

Business owners who are interested in establishing SIMPLE IRA plans must be aware of the deadline to do so, and the additional steps involved to ensure a successful and compliant set up.

© Copyright 2017 Retirement Learning Center, all rights reserved