A Refresher on Recharacterizations
By Tammy Schultz, QPA, CISP
One of our IRA owners died last year. His daughter, who is the executrix of his estate, came in today and asked to recharacterize his 2021 Roth IRA contribution because he was not eligible to make that contribution. May she do this?
Yes. According to Treasury Regulation 1.408A-5, Q&A 6, an executor, administrator, or other person responsible for filing the decedent’s final federal income tax return may elect to recharacterize a contribution on behalf of the deceased IRA owner if the IRA owner was eligible for a Traditional IRA contribution. If not, an ineligible contribution made by a decedent—which would be subject to a 6 percent penalty tax—can be removed, adjusted for earnings, at the request of the executor or other responsible person. The financial organization would report an eligible recharacterization in the decedent’s name and Social Security number, but would report the removal of an excess contribution and its earnings in the estate’s name and tax identification number. (If recharacterized, the amount contributed would belong to any named beneficiary(ies). If removed as an excess, it would belong to the decedent’s estate.)
Our IRA department knows that same-year and prior-year recharacterizations must be reported on separate Forms 1099-R. Is a carryback contribution that is later recharacterized considered a prior-year or a same-year recharacterization?
A prior-year recharacterization is one that occurs in the year after the year for which the recharacterized contribution was made. A carryback contribution is a contribution that is made between January 1 and the IRA owner’s tax return due date (generally April 15) for the previous tax year. Therefore, a carryback contribution that is recharacterized is considered a prior-year recharacterization and is reported with code R on Form 1099-R.
Are there any specific requirements that must be met for the required recharacterization election to be valid?
The IRA owner must make an irrevocable election to recharacterize the contribution. After the transaction is completed, the IRA owner cannot revoke the election. The election to recharacterize a contribution is made when the IRA owner notifies the organizations holding the distributing IRA and the receiving IRA that he is electing to treat the contribution as if it had been made to the receiving IRA. The notification to the financial organizations must include
the contribution type (i.e., Roth IRA or Traditional IRA) and dollar amount that is being recharacterized,
the date on which the contribution was made to the distributing IRA,
the year for which the contribution was made,
instructions to the organization holding the distributing IRA to directly move the elected amount with the earnings attributable to the receiving IRA (the transaction may not be done indirectly with a distribution to the IRA owner),
the names of the organizations—if different—holding the two IRAs, and
any additional information needed to complete the transaction.
Certain IRA forms providers, such as Ascensus, can provide you with a proper recharacterization request form that can be used to facilitate the recharacterization.
