by Barry C. Picker, CPA/PFS, CFP
© 1999, Barry C. Picker
The following copyrighted article is available exclusively on the Roth IRA Web Site:
As had been rumored, the Internal Revenue Service has announced in Announcement 99-57, that taxpayers who filed their tax returns by April 15, 1999, can still recharacterize their Roth IRAs back to their traditional IRAs.
There are a number of taxpayers who learned after their tax returns were filed, that their Roth conversion or contribution was improper. A strict reading of the statute and regulations would have subjected these taxpayers to immediate taxation of their IRA money, a 10% early withdrawal penalty if under age 59½, a 6% penalty for excess contribution to a Roth, and loss of all future tax deferral. Thankfully, this will no longer be the case, provided the taxpayer meets the requirements of the Announcement and recharacterizes by October 15, 1999.
The basis for the IRS announcement is that they have determined that the recharacterization is an "election". As such, Regulation Section 301.9100-2(b) applies to Roth recharacterizations. That section generally permits an automatic six month extension from the original due of a tax return to make an election that otherwise must be made by the extended due date of the tax return. In order to take advantage of this relief provision, a taxpayer must have (a) timely filed their tax return, and (b) taken corrective action, in this case effecting the recharacterization by taking the actions described in Reg. Sec. 1.408A-5, Q&A 6. Since the relief provision is for six months from the original due date, those taxpayers who are on extension, will not be able to get an extension past October 15th to do recharacterizations for 1998.
Taxpayers taking advantage of this extended time to recharacterize, must file an amended return to reflect the recharacterization, although the amended return itself need not be filed by October 15, 1999. Rather, the amended return can be filed any time up to the normal time for filing amended 1998 returns, April 15, 2002.
A key planning point to keep in mind here is that the Announcement does not only apply to people to must recharacterize. It also applies to anyone who may want to recharacterize. So for those who are still having second, third or more thoughts about whether they did the right thing by converting their IRAs to Roths, there is still time to change their mind. Similarly, anyone who contributed their annual contribution to a traditional IRA and has since discovered that a Roth contribution would have been a better choice, can still recharacterize their contribution to a Roth. But if previous experience is any guide, the IRA trustee/custodians will not be aware of all the nuances of the Announcement.
It would appear from the wording of the Announcement, that this is not a one
shot relief provision for 1998, although the announcement itself only discusses 1998 tax
returns. It remains to be seen whether this provision will be applicable for all future
tax years, or only for 1998.
The Author:
Barry C. Picker is a Certified Public Accountant with the Personal Financial Specialist
designation, and is a Certified Financial Planner licensee. He runs his own accounting and
financial planning firm located in Brooklyn, NY, and is also a member of the NYS Society
of CPAs Estate Planning Committee. He has taught seminars and written articles on tax
topics, and has been quoted in various publications. In addition, he is part of a panel
that answers tax questions on America Online at keyword:TaxLogic. He can be reached at
(718) 934-4300, or via E-Mail at BPickerCPA@cs.com.