When Can I Make Contributions?

You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).

You can make contributions for 2002 by the due date (not including extensions) for filing your 2002 tax return. This means that most people can make contributions for 2002 by April 15, 2003.

What If I Contribute Too Much?

A 6% excise tax applies to any excess contribution to a Roth IRA.

Excess contributions. These are the contributions to your Roth IRAs for a year that equal thetotal of:

1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can be Contributed?), plus
2. Any excess contributions for the preceding year, reduced by the total of:
   1. Any distributions out of your Roth IRAs for the year, plus
   2. Your contribution limit for the year minus your contributions to all your IRAs for the year.

Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn and are reported as income earned and receivable in the year the contribution was made.

Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.

Can I Move Amounts
Into a Roth IRA?

You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from one Roth IRA to another Roth IRA.

Conversions

You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, the 1-year waiting period does not apply.

Conversion methods. You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.

1. Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
2. Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.
3. Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.

Same trustee. Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.

Converting From Any Traditional IRA

You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.

1. Your modified AGI (explained earlier) is not more than $100,000.
2. You are not a married individual filing a separate return.

Note. If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.

Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% tax on early distributions. See chapter 1 for more information on distributions from traditional IRAs and the tax on early distributions.

Periodic distributions. An individual who has started taking substantially equal periodic payments from a traditional IRA can convert the account to a Roth IRA and then continue the periodic payments. The 10% early distribution tax will not apply even if the distributions are not qualified distributions (as long as they are part of a series of substantially equal periodic payments).

Required distributions. Amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 701/2) under the required distribution rules (discussed in chapter 1) cannot be converted.

Inherited IRAs. If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA.

Income. You must include in your gross income distributions from a traditional IRA that you would have to include in income if you had not converted them into a Roth IRA. You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed under Are Distributions Taxable, in chapter 1.

If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Converting From a SIMPLE IRA

Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained earlier under Converting From Any Traditional IRA.

However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer.

Rollover From a Roth IRA

You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers.

A rollover from a Roth IRA to an employer retirement plan is not allowed.

Failed Conversions

If, when you converted amounts from a traditional IRA or SIMPLE IRA into a Roth IRA, you expected to have modified AGI of less than $100,000 and a filing status other than married filing separately, but events changed these facts, you have made a failed conversion.

Adverse consequences. If the converted amount (contribution) is not recharacterized (explained later), the contribution will be treated as a regular contribution to the Roth IRA and subject to the following tax consequences.

1. A 6% excise tax per year will apply to any excess contribution not withdrawn from the Roth IRA.
2. The distributions from the traditional IRA must be included in your gross income.
3. The 10% additional tax on early distributions may apply to any distribution.

How to avoid. You must move the amount converted (including all earnings from the date of conversion) into a traditional IRA by the due date (including extensions) for your tax return for the year during which you made the conversion to the Roth IRA. You do not have to include this distribution (withdrawal) in income. See Recharacterization of original contribution, later under Recharacterizations, for more information.

Recharacterizations

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.

How to recharacterize. To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. It will be treated as having been made to the second IRA on the same date that it was actually made to the first IRA. You must report the recharacterization, and must treat the contribution as having been made to the second IRA, instead of the first IRA, on your tax return for the year during which the contribution was made.

If you file your return timely without making the election, you can still make the choice by filing an amended return within six months of the due date of the return (excluding extensions). Report the recharacterization on the amended return and write Filed pursuant to section 301.9100-2 on the return. File the amended return at the same address you filed the original return.

Net income must be transferred. The contribution will not be treated as having been made to the second IRA unless the transfer includes any net income allocable to the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be transferred. If there was a loss, the net income you must transfer may be a negative amount.

No deduction allowed. No deduction is allowed for the contribution to the first IRA and any net income transferred with the recharacterized contribution is treated as earned in the second IRA. The contribution will not be treated as having been made to the second IRA to the extent any deduction was allowed with respect to the contribution to the first IRA.

Conversion by rollover from traditional to Roth IRA. For recharacterization purposes, a distribution from a traditional IRA that is received in one tax year and rolled over into a Roth IRA in the next year, but still within 60 days of the distribution from the traditional IRA, is treated as a contribution to the Roth IRA in the year of the distribution from the traditional IRA.

Effect of previous tax-free transfers. If a contribution has been moved from one IRA to another in a tax-free transfer, such as a rollover, the contribution to the second IRA generally cannot be recharacterized. However, see Move from traditional to SIMPLE IRA, later.

Recharacterization of original contribution. A contribution to one IRA that has been moved between IRAs in tax-free transfers can be treated as if it remained in the first IRA, the IRA that received the original contribution. This means that you can elect to recharacterize the contribution to the first IRA by having a trustee-to-trustee transfer of the contribution made from the IRA in which it now resides to a second IRA and treating the contribution as having been made to the second IRA on the same date it was actually made to the first IRA. If both IRAs involved in the trustee-to-trustee transfer are maintained by the same trustee, you need only direct that trustee to transfer the contribution.

Roth IRA conversion contributions from a SEP-IRA or SIMPLE IRA can be recharacterized to a SEP-IRA or SIMPLE IRA (including the original SEP-IRA or SIMPLE IRA).

Move from traditional to SIMPLE IRA. If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA.

Applying excess contributions. You can recharacterize only actual contributions. If you are applying excess contributions for prior years as current contributions, you can recharacterize them only if the recharacterization would still be timely with respect to the tax year for which the applied contributions were actually made.

Employer contributions. You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. SEPs are discussed in chapter 3. SIMPLE plans are discussed in chapter 4.

Recharacterizations not counted as rollover. The recharacterization of a contribution is not treated as a rollover for purposes of the 1-year waiting period described in chapter 1 under Rollover From One IRA Into Another. This is true even if the contribution would have been treated as a rollover contribution by the second IRA if it had been made directly to the second IRA rather than as a result of a recharacterization of a contribution to the first IRA.

Reconversions

You cannot convert and reconvert an amount during the same taxable year, or if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion.

How Do I Recharacterize a Contribution?

To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA that you have elected to treat, for federal tax purposes, the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information.

• The type and amount of the contribution to the first IRA that is to be recharacterized.
• The date on which the contribution was made to the first IRA and the year for which it was made.
• A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income allocable to the contribution to the trustee of the second IRA. If there was a loss while the contribution was in the first IRA, the net income that must be transferred may be a negative amount.
• The name of the trustee of the first IRA and the name of the trustee of the second IRA.
• Any additional information needed to make the transfer.

Note. If the trustee of your first IRA is unable to calculate the amount of net income you must transfer, get IRS Notice 2000-39 or section 1.408A-5, A-2(c) of the proposed regulations. These explain the IRS-approved methods of calculating the amount you must transfer. To obtain a copy of this notice, see Mail in chapter 6. This proposed regulation is published in 2002-33 Internal Revenue Bulletin at page 383. This notice and proposed regulation can also be found in many libraries and IRS offices.

Timing. The election to recharacterize and the transfer must both take place on or before the due date (including extensions) for filing your tax return for the year for which the contribution was made to the first IRA.

If you have timely filed your tax return, you have an automatic 6-month extension to recharacterize a contribution or a conversion.

Decedent. The election to recharacterize can be made by the executor, administrator, or other person responsible for filing the decedent's final income tax return.

Election cannot be changed. After the transfer has taken place, you cannot change your election to recharacterize.

Same trustee. Recharacterizations made with the same trustee can be made by redesignating the first as the second IRA, rather than transferring the account balance.

Reporting a Recharacterization

If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. You must treat the contribution as having been made to the second IRA.

Recharacterization Examples

Example 1. On June 1, 2002, Christine properly and timely converted her traditional IRAs to a Roth IRA. At the time, she and her husband, Jeremy, expected to have modified AGI of less than $100,000 for 2002. In December, Jeremy received an unexpected bonus that increased his and Christine's modified AGI to more than $100,000. In January, 2003, to make the necessary adjustment to remove the unallowable conversion, Christine set up a traditional IRA with the same trustee. Also in January 2003, she instructed the trustee of the Roth IRA to make a trustee-to-trustee transfer of the conversion contribution made to the Roth IRA (including net income allocable to it since the conversion) to the new traditional IRA. She also notified the trustee that she was electing to recharacterize the contribution to the Roth IRA and treat it as if it had been contributed to the new traditional IRA. Because of the recharacterization, Jeremy and Christine have no taxable income from the conversion to report for 2002, and the resulting rollover to a traditional IRA is not treated as a rollover for purposes of the one-rollover-per-year rule.

Example 2. On April 1, 2002, your traditional IRA is worth $100,000. You convert the entire amount, consisting of 100 shares of stock in ABC Corp. and 100 shares of stock in XYZ Corp., by transferring the shares to a Roth IRA. At the time of conversion, the 100 shares in ABC Corp. are worth $50,000, and the 100 shares in XYZ Corp. are also worth $50,000. You decide that you would like to recharacterize the ABC Corp. shares back to a traditional IRA. However, you can choose the contribution or portion thereof that is to be recharacterized only by dollar amount.

On the date of transfer, November 1, 2002, the 100 shares of stock in ABC Corp. are worth $40,000 and the 100 shares of stock in XYZ Corp. are worth $70,000. No other contributions have been made to the Roth IRA and no distributions have been made. If you request that $50,000 (which was the value of the ABC Corp. shares at the time of conversion) be recharacterized, the net income allocable to the $50,000 is $5,000 [$50,000 x ($110,000 - $100,000)/$100,000]. Therefore, in order to recharacterize $50,000 of the April 1, 2002, conversion contribution on November 1, 2002, the Roth IRA trustee must transfer from your Roth IRA to a traditional IRA assets with a value of $55,000 [$50,000 + $5,000].

If, on the other hand, you request that $40,000 (which was the value of the ABC Corp. shares on November 1) be recharacterized, the net income allocable to the $40,000 is $4,000 [$40,000 x ($110,000 - $100,000/$100,000]. Therefore, in order to recharacterize $40,000 of the April 1, 2002, conversion contribution on November 1, 2002, the Roth IRA trustee must transfer from your Roth IRA to a traditional IRA assets with a value of $44,000 [$40,000 + $4,000]. Regardless of the amount of the contribution recharacterized, the determination of that amount (or of the net income allocable to it) is not affected by whether the recharacterization is accomplished by the transfer of shares of ABC Corp. or of shares of XYZ Corp.

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