Coordinating Income and
Estate Planning for IRAs and
Qualified Plans
Presented by:
Robert S. Keebler, CPA, MST
1400 Lombardi Ave., Ste 200
P.O. Box 11997
Green Bay, WI 54307-1997
Ph: (920) 490-5626
Fax: (920) 499-1050
E-mail: rkeebler@virchowkrause.com
1
Why Retirement Distribution
Planning is Important
Potential tax exposure to IRA
without planning
Net to Family
29.00%
Federal &
State Estate
Tax, 50.00%
Income Tax,
21.00%
2
IRAs Payable to
Trusts
3
IRAs Payable to Trusts
How an IRA is Payable to a Trust
IRA
Beneficiary
Designation Form
Trust
IRA distributions over
the life expectancy of
the oldest beneficiary
Spouse
Children
4
IRAs Payable to Trusts
Benefits of Using a Trust







Spendthrift protection
Creditor protection
Divorce protection
Special needs
Investment management
Estate planning
“Dead-hand” control
5
IRAs Payable to Trusts
Disadvantages of Using a Trust




Trust tax rates
Legal and trustee fees
Income tax returns
Greater complexity
6
IRAs Payable to Trusts
Other Considerations

Older or unidentifiable contingent beneficiary

Estate as contingent beneficiary

Powers of appointment

Failure of beneficiaries clause


Failure to provide trust document to custodian
by October 31 of year following year of death
Making lump sum distribution to trust
7
IRAs Payable to Trusts
Four Requirements of All IRA Trusts




Trust is valid under state law
Trust is irrevocable upon death of owner
Beneficiaries of the trust are identifiable
from the trust instrument
Documentation requirement is satisfied
8
IRAs Payable to Trusts
Types of IRA Trusts


Accumulation Trusts
Conduit Trusts
9
IRAs Payable to Trusts
Conduit Trusts
A trust in which all distributions from the
IRA are immediately distributed to the trust
beneficiary/beneficiaries
10
IRAs Payable to Trusts
Conduit Trusts – Example #1
IRA
Trust
Discretionary
Distributions, but no
less than total
withdrawals from IRA
Entire Trust outright
upon Grandchildren
reaching age 30
If Grandchildren die
before reaching age 40
Child –
age 30
Child –
age 30
Mother is not
“countable” for
determining
applicable life
expectancy
Mother
Age 80
11
IRAs Payable to Trusts
Conduit Trusts – Example #2
IRA
Trust
All distributions
from IRA
Child #1
At Child #1’s death
To Red Cross
12
IRAs Payable to Trusts
Accumulation Trusts
A trust in which distributions from the IRA
are allowed to accumulate within the trust
13
IRAs Payable to Trusts
Accumulation Trusts
The key issue in analyzing an
accumulation trust is to determine which
beneficiaries are “countable.”
All beneficiaries are countable unless
such beneficiary is deemed to be a
“mere potential successor” beneficiary.
14
IRAs Payable to Trusts
Accumulation Trusts – Example #1
IRA
Trust
Discretionary
Distributions
Entire Trust outright
upon Grandchildren
reaching age 30
If Grandchildren die
before reaching age 40
Child –
age 30
Child –
age 30
Mother is “countable”
for determining
applicable life
expectancy
Mother
Age 80
15
IRAs Payable to Trusts
Accumulation Trusts – Example #2
IRA
Trust
Discretionary
Distributions
Grandchildren
Entire Trust outright
upon Grandchildren
reaching age 30
Grandchildren
Accumulation Trust
Sister measuring life
for determining
required minimum
distributions
If Grandchildren die
before reaching age 30
Sister
Age 67
16
IRAs Payable to Trusts
Separate Shares


In proper circumstances, the IRS allows the
division of the IRA into separate shares per
beneficiary
In the case of an individual beneficiary, this
must be determined by December 31 of the
year following the year of death
– Separate shares established when divided



No separate shares available for estates
Disclaimer rule
Death by September 30
17
IRAs Payable to Trusts
Separate Shares
Payable to single trust
No separate shares identified in the
beneficiary designation form
IRA paid over oldest life expectancy
18
IRAs Payable to Trusts
Separate Shares
IRA payable to multiple sub-trusts
Each trust named in
beneficiary designation form
IRA paid trust beneficiary’s life expectancy
19
IRAs Payable to Trusts
Separate Shares – PLR 200537044

Ruling 1: Each Beneficiary’s Trust Share Qualified for
Maximum Stretch-out.
– Upon the death of the Settlor, the IRA stand-alone trust creates
separate shares for each beneficiary (in this case, separate
shares for 9 beneficiaries), each trust share “treated effective
ab initio to the date of the Decedent’s death” and each share
functioned as a “separate and distinct trust” for the beneficiary.
– The beneficiary designation form named each separate share
as a primary beneficiary of the IRA.
– Before the December 31st deadline, the IRA was divided into
separate accounts for each share.
– Held: Separate account treatment permitted; MRD of the IRA
for each separate trust share measured by the lifetime of its
sole beneficiary for whom the share was created.
20
IRAs Payable to Trusts
Separate Shares – PLR 200537044

Ruling 2: Allowance of One-Time “Toggle” Between
Accumulation and Conduit Trust.
– Each separate share in the IRA stand-alone trust had language
structuring the separate share as a conduit trust.
– The trust provided for an independent 3rd party, as “trust
protector” to transform each sub-trust to an accumulation
trust in the protector’s sole discretion by voiding the conduit
provisions ab initio.
– Trust Protector had the authority to limit the initial trust
beneficiary ab initio.
– After Participant’s date of death, Trust Protector exercised
“toggle” and converted one share to an accumulation trust.
– Held: Each share can use that the life expectancy of its initial
beneficiary to measure the MRD for that share.
21
IRAs Payable to Trusts
Separate Shares – PLR 200537044

Ruling 3: Payment of Expenses from IRA not considered
an accumulation.
– The trust provided that “Trust expenses may be deducted prior
to any such payment to or for the benefit of the beneficiary of
the trust share if the deduction does not disqualify the status of
the trust as a conduit trust. This paragraph may be rendered
void, ab initio, by the Trust Protector. . .”
– Held: Each share can use that the life expectancy of its initial
beneficiary to measure the MRD for that share.
Why? Even with the deduction for payment of trust expenses,
no amounts distributed to the trust during the beneficiary’s
lifetime would be accumulated in the trust, and thus would not
be kept in the trust for the benefit of any future beneficiaries.
Treas. Reg. § 1.401(a)(9)-5 Q&A 7(c)(3), Example 2.
22
IRAs Payable to Trusts
Separate Shares – PLR 200537044

Ruling 4: The trust assets will not be included in
the estate of the primary beneficiary of a share
upon that beneficiary’s death.
– Each trust share would accumulate the net income of the
trust, and distributions of income and principal could
distribute accumulated income and principal to the primary
beneficiary for his or her health, education, maintenance
and support only.
– The document did not grant any beneficiary a general
power of appointment over his or her share.
– Held: The provisions of the trust could not result in estate
inclusion for the estate of a primary beneficiary upon his
death.
23
IRAs Payable to Trusts
Naming a Revocable Trust as Beneficiary




Proper apportionment language regarding
payment of debts, expenses and taxes of estate
(See PLR 9820021)
Recognition of income in respect of a decedent
(IRD) if pecuniary funding clause is utilized
Unanticipated loss of designated beneficiary due
to the inclusion of power of appointment
(general or limited)
Solution – stand-alone IRA trust such as “IRA
Legacy Trust”
24
IRAs Payable to Trusts
Naming a Revocable Trust as Beneficiary

Fractional v. Pecuniary clauses
– Recognition of income



Entire trust irrevocable at death of IRA owner
No separate share treatment
Payment of debts, taxes, and expenses
– Apportionment language
– Firewall provision



Powers of appointment
Stand alone trust – highly recommended
Adoption of older individuals
25
IRAs Payable to Trusts
Naming a Revocable Trust as Beneficiary

Revocable trust should use a fractional
funding clause to determine the marital
and bypass shares
– PLRs in which pecuniary funding clause
utilized and no IRD acceleration issue (PLRs
199912040, 9808043, 9744024)
26
IRAs Payable to Trusts
Naming a Revocable Trust as Beneficiary
Pecuniary Clause - Sample
The Marital Share shall consist of assets in a pecuniary amount
which, after taking into account all other property included in
the Settlor’s gross estate for federal estate tax purposes which
qualified for the federal estate tax marital deduction and which
passes or has passed to the Settlor’s wife under this instrument
or in any other manner, is equal to the smallest amount which
will eliminate all federal estate tax payable by the Settlor’s
estate, or if that is not possible, the amount which will result in
the least federal estate tax payable by the Settlor’s estate. In
determining “federal estate tax payable”, all credits and
deductions against that tax shall be taken into account,
provided that the federal credit for state death taxes shall only
be considered for the extent it does not create or increase a
state death tax which is based on the federal credit for state
death taxes.
27
IRAs Payable to Trusts
Naming a Revocable Trust as Beneficiary
Fractional Clause - Sample
The Marital Share shall consist of that fractional share of the trust estate
which shall be determined as follows:
(a) The numeration of the fraction shall be the smallest amount which,
after taking into account all other property included in the Settlor’s
gross estate for federal estate tax purposes which qualifies for the
federal estate tax marital deduction and which passes or has
passed to the Settlor’s wife under this instrument or in any other
manner, will eliminate all federal estate tax payable by the Settlor’s
estate, or if that is not possible, the amount which will result in the
least federal estate tax payable by the Settlor’s estate. In determining
“federal estate tax payable”, all credits and deductions against that tax
shall be taken into account, provided that the federal credit for state
death taxes shall only be considered to the extent it does not create or
increase a state death tax which is based on the federal credit for state
taxes.
(b) The denominator of the fraction shall be the value of the trust estate
28
Disclaimers
29
Disclaimers
Disclaimer must be “qualified.”
 In writing
Within 9 months
 No acceptance of the interest or any of
its benefits,
 Interest passes without any direction on
the part of the person making the
disclaimer

30
Disclaimers
Example
Alex dies at age 70. Alex’s wife disclaims amount
of Alex’s unified credit to bypass trust for benefit
of herself and their children
– Disclaimer must occur within nine months from
date of death
– Disclaimer must be served to the IRA custodian
– Disclaimer must be fractional to avoid immediate
income taxation
31
Disclaimers
Revenue Ruling 2005-36
A beneficiary's disclaimer of a beneficial interest
in a decedent's IRA is a qualified disclaimer even
though, prior to making the disclaimer, the
beneficiary receives the required minimum
distribution for the year of the decedent's death
from the IRA.
32
Disclaimers
Revenue Ruling 2005-36
SCENARIO 1 – Pecuniary Disclaimer by Spouse
IRA
Required Minimum Distribution
($100,000)
Pecuniary disclaimer of IRA
balance ($600,000) plus
income earned since date
of death ($12,000)
Result: Spouse’s
pecuniary disclaimer,
after taking RMD,
still results in a
“qualified disclaimer”
Spouse
Primary Beneficiary
First Contingent Beneficiary – If
spouse disclaimed IRA as Primary
Beneficiary
Child A
Key assumptions:
IRA Balance (date of death) - $2,000,000
IRA Balance (date of disclaimer) - $2,040,000
Required Minimum Distribution - $100,000
33
Disclaimers
Revenue Ruling 2005-36
SCENARIO 2 – Fractional Disclaimer by Spouse
IRA
Required Minimum Distribution
($100,000) plus income earned
since date of death ($2,000)
Primary Beneficiary
Spouse
Fractional disclaimer (30%) of
net remaining IRA balance
after RMD (including income
attributable to RMD) plus
income earned since date of
death
First Contingent Beneficiary – If
spouse disclaimed IRA as Primary
Beneficiary
Result: Spouse’s
fractional disclaimer,
after taking RMD
(plus attributable
income), still results
in a “qualified
disclaimer”
Child A
Key assumptions:
IRA Balance (date of death) - $2,000,000
IRA Balance (date of disclaimer) - $2,040,000
Required Minimum Distribution - $100,000
34
Disclaimers
Revenue Ruling 2005-36
SCENARIO 3 – Full Disclaimer by Child A
IRA
Required Minimum Distribution
($100,000) plus income earned
since date of death ($2,000)
Primary Beneficiary
Spouse
Full disclaimer of net remaining
IRA balance after RMD
(including income attributable
to RMD) plus income earned
since date of death
First Contingent Beneficiary – If
Child A disclaimed IRA as Primary
Beneficiary
Result: Child A’s full
disclaimer, after
taking RMD (plus
attributable income),
still results in a
“qualified disclaimer “
Child A
Key assumptions:
IRA Balance (date of death) - $2,000,000
IRA Balance (date of disclaimer) - $2,040,000
Required Minimum Distribution - $100,000
35
QTIP-IRA
36
QTIP-IRA

Qualifying for the marital deduction

Definition of “income”

Qualifying as a “designated beneficiary” trust
37
QTIP-IRA
Qualifying for the Marital Deduction
In general, in order for a QTIP trust to qualify for the marital
deduction under IRC §2056(b)(7), it must meet all of the
following requirements:




All the property in the trust was received from the deceased
spouse and was included in that spouse’s taxable estate.
The trust provides that during the lifetime of the surviving
spouse, all income is paid to that spouse at least annually.
No other person has any right or can receive any benefit from
the trust while the during the surviving spouse’s lifetime.
A valid election must be made on the deceased spouse’s estate
tax return.
38
QTIP-IRA
Fiduciary vs. Tax Accounting Income


Fiduciary accounting income is governed by
state law and the trust instrument
Tax accounting income is governed by the
federal income tax law
39
QTIP-IRA
Traditional Types of “Income”

Interest
– Taxable
– Tax-exempt



Dividends
Rents (net of expenses)
Royalties
40
QTIP-IRA
Traditional Types of “Principal”





IRA value as of date of death
Increases in asset value (i.e. growth)
Realized long-term capital gain
Realized short-term capital gain
Proceeds from covered call writing
41
QTIP-IRA
Revenue Ruling 2006-26





Traditional fiduciary accounting income
Equitable adjustments under UPIA §104(a)
Unitrust payments
“10% rule” under UPIA §409(c)
“Savings clause” under UPIA §409(d)
42
QTIP-IRA
Revenue Ruling 2006-26
Equitable Adjustment

UPIA §104(a) provides trustees the power to
adjust between income and principal if a trust
cannot be administered fairly between the
income and remainder beneficiaries
NOTE: Revenue Ruling 2006-26 holds that,
notwithstanding a trustee’s application of UPIA
§104(a), a trust will qualify the marital deduction
43
QTIP-IRA
Revenue Ruling 2006-26
Unitrust Payment
 Revenue
Ruling 2006-26 approves unitrust trust
payments paid pursuant to UPIA §409(c) under
applicable state law
Example: IRA is valued at $1,000,000. Pursuant to state
law, the trust is makes a unitrust distribution of 4%
($40,000). In this case, the $40,000 is a qualified
“income” interest.
44
QTIP-IRA
Revenue Ruling 2006-26

UPIA “10% Rule”
UPIA §409(c) provides that 10% of IRA (and
other qualified plan) distributions are
considered to be “income”
Example: RMD from IRA is $40,000. Pursuant to UPIA
§409(c), $4,000 ($40,000 x 10%) is considered to be “income”.
WARNING: This type of clause may not qualify as
“income” under Rev. Rul. 2006-26.
45
QTIP-IRA
Distributable QTIP-IRA “Income”
IRA has a current value of $1,000,000 and interest
and dividend income of $60,000. RMD is $50,000.
Fiduciary
Accounting
Income
Distributable
Income
$60,000
10% Rule
Under UPIA
§409(c)
4% Unitrust
$40,000
$5,000
$50,000 RMD x 10%
46
QTIP-IRA
Savings Clause

UPIA §409(d) provides trustees the discretion
to make additional payments in order to
qualify the payments as “income” for
purposes of the marital deduction.
WARNING: This type of clause may not save
the QTIP election under Rev. Rul. 2006-26.
47
Other IRA
Planning Issues
48
Other IRA Planning Issues
Income in Respect to a Decedent (IRD)
Income in respect of a decedent (IRD) – is all
items of gross income in respect of a decedent
which were not properly included as taxable
income in a tax period falling on or before a
taxpayer’s death and are payable to his/her
estate and/or another beneficiary
49
Other IRA Planning Issues
Income in Respect to a Decedent (IRD)
Specific Items of IRD





IRAs and other qualified retirement plans
Unpaid salaries/wages at the time of death
Dividends and interest earned, but not taxed, prior to
death
Unrecognized capital gain on an installment note at
the time of the seller’s death
Net Unrealized Appreciation (NUA) on employer
securities (see later discussion)
50
Other IRA Planning Issues
IRC §691(c) Deduction

To the extent that a decedent’s taxable estate
includes items of IRD and a federal estate tax
is assessed, the estate and/or its beneficiaries
are entitled to an income tax deduction for the
estate tax attributable to IRD
– This deduction is a miscellaneous itemized
deduction NOT subject to the 2% AGI limitation
51
Other IRA Planning Issues
IRC §691(c) Deduction

The income tax deduction computation for
estate taxed paid on IRD is determined on a
“with and without” basis
– In essence, the total deduction allowed is the
difference between: (a) the estate tax liability with
all items of IRD included in the taxable estate and
(b) the estate tax liability without the IRD included
in the taxable estate
52
Other IRA Planning Issues
IRC §691(c) Deduction
Example
On July 1, 2007, Jackie passed away leaving the following
assets:
Cash & money market
Accrued interest
Marketable securities (non-qualified)
Accrued interest & dividends
IRA
Primary Residence
Cottage
Personal property
TOTALS
Non-IRD
$
15,000 $
750,000
350,000
150,000
50,000
$
1,315,000 $
IRD
$
100
9,900
1,500,000
1,510,000 $
Total
15,000
100
750,000
9,900
1,500,000
350,000
150,000
50,000
2,825,000
53
Other IRA Planning Issues
IRC §691(c) Deduction
Example (cont.)
Subsequent to her death, the personal representative
withdrew $50,000 from Jackie’s IRA. Accordingly, the
IRC §691(c) attributable to the $50,000 distribution
would be as follows:
Gross Estate
Less: Exemption
Taxable Estate
With IRD
$ 2,825,000
(2,000,000)
$ 825,000
Estate Tax
$ 371,250 $
Gross IRC §691(c) Deduction
$ 371,250
(Difference between estate tax with and without IRD)
Without IRD
$ 1,315,000
(2,000,000)
$
-
54
Other IRA Planning Issues
IRC §691(c) Deduction
Example (cont.)
IRD
Interest - Cash & money market
Interest & dividends - Brokerage account
IRA
TOTAL
Gross IRA distribution
IRC §691(c) apportionment percentage
IRC §691(c) deduction
$
100
9,900
1,500,000
$ 1,510,000
Allocable
IRC §691(c)
Deduction
$
25
2,434
368,791
$ 371,250
$
(i.e. $368,791/$1,510,000)
50,000
24.423%
$ 12,212
55
Other IRA Planning Issues
Excess Accumulations Penalty
A 50% penalty is assessed to the extent that a
taxpayer has not taken his/her RMD for the tax
year.
Example
Assume Peter was required to take out $30,000 from his
IRA in 2007, but only withdrew $20,000. In this case,
Peter would be subject to a $5,000 [($30,000 - $20,000)
x 50%] excess accumulations penalty. Further, Peter
would still be required to withdraw the $10,000
deficiency from his IRA.
56
Other IRA Planning Issues
Excess Accumulations Penalty
Requesting a Waiver

Under IRC §4974(d), the tax may be waived if the
taxpayers can establish that the shortfall in distributions
was due to reasonable error and reasonable steps are
being taken to remedy the shortfall. An accumulation
occurs because of “reasonable error" when it occurs
through no fault of the plan participant.

Complete Form 5329

Attach letter requesting waiver
57
Roth IRAs
58
Roth IRAs


100% of growth is tax-exempt
No required minimum distributions at age 70½
– NOTE: Distributions from Roth IRAs cannot be used
to fulfill the RMD from a traditional IRA



$100,000 Modified Adjusted Gross Income
(MAGI) limitation
RMDs on Inherited Roth IRAs
Roth 401(k) plans
59
Roth IRAs

Starting in 2010, the $100,000 Adjusted Gross
Income (AGI) limitation no longer applies
– The tax incurred on a Roth IRA conversion in 2010
may be spread over the following two tax years (i.e.
2011 and 2012)

Married Filing Separately taxpayers can convert
to a Roth IRA
60
Roth IRAs

Convertible accounts
–
–
–
–
–

Traditional IRAs
401(k) plans (Starting in 2008)
Profit sharing plans (Starting in 2008)
403(b) annuity plans (Starting in 2008)
457 plans (Starting in 2008)
Non-Convertible accounts
– “Inherited” IRAs
– Education IRAs
61
Roth IRAs
Taxation of Distributions




Basis Can be Withdrawn Tax-Free (FIFO Method)
Distributions are not subject to income tax if they
do not exceed aggregate contributions and/or
conversions to the Roth IRA
Withdrawals made within five years of conversion
if owner under age 59½ and no other exception
applies
Five-year period independent of five-year period
for qualified distribution
62
Roth IRAs
Seven Reasons to Convert to Roth IRAs
(1) Taxpayers have special favorable tax attributes including
charitable deduction carry-forwards, investment tax credits,
etc.
(2) Suspension of the minimum distribution rules at age 70½
provides a considerable advantage to the Roth IRA holder.
(3) Taxpayers benefit from paying income tax before estate
tax (when a Roth IRA election is made) compared to the
income tax deduction obtained when a traditional IRA is
subject to estate tax.
(4) Taxpayers who can pay the income tax on the IRA from non
IRA funds benefit greatly from the Roth IRA because of the
ability to enjoy greater tax-free yields.
63
Roth IRAs
Seven Reasons to Convert to Roth IRAs
(5) Taxpayers who need to use IRA assets to fund their Unified
Credit bypass trust are well advised to consider making a
Roth IRA election for that portion of their overall IRA funds.
(6) Taxpayers making the Roth IRA election during their
lifetime reduce their overall estate, thereby lowering the
effect of higher estate tax rates.
(7) Because federal tax brackets are more favorable for
married couples filing joint returns than for single
individuals, Roth IRA distributions won’t cause an
increase in tax rates for the surviving spouse when one
spouse is deceased because the distributions are taxfree.
64
Roth IRAs
Understanding the Mechanics

The key to successful Roth IRA conversions
is to keep as much of the conversion income
as possible in the current marginal tax
bracket
– However, there are times when it may make sense
to convert more and go into higher tax brackets
65
Roth IRAs
Understanding the Mechanics
In simplest terms, a traditional IRA will produce
the same after-tax result as a Roth IRA
provided that:
–
–
The annual growth rates are the same
The tax rate in the conversion year is the same as
the tax rate during the withdrawal years
(i.e. A x B x C = D; A x C x B = D)
66
Roth IRAs
Understanding the Mechanics
Example
2007 Account Balance
Less: Income Taxes @ 40%
Net Balance
Traditional IRA
Roth IRA
$
100,000 $
100,000
(40,000)
$
100,000 $
60,000
Growth Until Death
Account Balance @ Death
Less: Income Taxes @ 40%
Net Account Balance to Family
300.00%
$
$
300,000 $
(120,000)
180,000 $
300.00%
180,000
180,000
67
Roth IRAs
Understanding the Mechanics

Critical decision factors
– Tax rate differential
•
Year of conversion vs. withdrawal years
– Use of “outside funds” (i.e. non-qualified retirement
accounts) to pay the income tax liability
– Time horizon
– IRC §691(c) “affect”
68
Roth IRAs
Understanding the Mechanics

The key to successful Roth IRA conversions
is to keep as much of the conversion income
as possible in the current marginal tax bracket
– However, there are times when it may make sense
to convert more and go into higher tax brackets
69
Roth IRAs
Understanding the Mechanics
Tax Brackets (2007)
Single
Married Filing
Jointly
Head of
Household
10%
$7,825
$15,650
$10,750
15%
$31,850
$63,700
$42,650
25%
$77,100
$128,500
$110,100
28%
$160,850
$195,850
$178,350
33%
$349,700
$349,700
$349,700
35%
> $349,700
> $349,700
> $349,700
70
Roth IRAs
Understanding the Mechanics
Optimum Roth IRA
conversion amount?
35% tax
bracket
Target Roth IRA
conversion amount
33% tax
bracket
Current
taxable income
28% tax
bracket
25% tax
bracket
15% tax
bracket
10% tax
bracket
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Roth IRAs
Understanding the Mechanics

Taxpayers may recharacterize (i.e. “undo”) the
Roth IRA conversion in current year or by the
filing date of the current year’s tax return
– Recharacterization can take place as late as 10/15
in the year following the year of conversion

Taxpayers may choose to “reconvert” their
recharacterization
– Reconversion may only take place at the later of
the following two dates:
•
•
The tax year following the original conversion OR
30 days after the recharacterization
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Roth IRAs
Roth IRA Conversion Timetable
Conversion Period
Recharacterization Period
2007
1/1/2007 –
First day
conversion can
take place
2008
12/31/2007 –
Last day
conversion can
take place
4/15/2008 –
Normal filing
date for 2007
tax return
10/15/2008 –
Latest filing
date for 2007
tax return / last
day to
recharacterize
2007 Roth IRA
conversion
12/31/2008
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Roth IRAs
Anti “Cherry-Picking” Rule

Taxpayers cannot recharacterize a portion of
a Roth conversion by “cherry picking” only
those stocks that decline in value
(IRS Notice 2000-39)

All gains and losses to the entire Roth IRA,
regardless of the actual stock or fund recharacterized, must be pro-rated
74
Roth IRAs
Roth IRA Segregation Conversion Strategy
STEP 1 – Convert Traditional IRA Into Two Separate Roth
IRAs
Traditional IRA
ABC Fund: $250,000
YYZ Fund: $250,000
Roth IRA #1
ABC Fund: $250,000
Roth IRA #2
YYZ Fund: $250,000
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Roth IRAs
Roth IRA Segregation Conversion Strategy
STEP 2 – Payment of Income Taxes on Roth IRA
Conversion
April 15, 2008*
Taxpayer
Income tax liability due on
$500,000 conversion amount
IRS
* NOTE: Either a tax return or an extension must be filed by this date. Regardless of what
is chosen, the tax liability due on the Roth IRA conversion must be remitted by this date
in order to avoid late payment penalties and interest.
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Roth IRAs
Roth IRA Segregation Conversion Strategy
STEP 3 – Recharacterization of Roth IRA Conversion
October 15, 2008*
Traditional IRA #1
ABC Fund: $125,000
(Current Value)
Recharacterization of IRA using
the value at the date of
conversion (e.g. $250,000)
Roth IRA #1
ABC Fund: $125,000
(Current Value)
Roth IRA #2
YYZ Fund: $275,000
(Current Value)
* NOTE: October 15, 2008 is the latest date for which a 2007 recharacterization can take
place (either by filing extensions or by filing an amended return).
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Roth IRAs
Roth IRA Segregation Conversion Strategy
STEP 4 – Refund on Overpayment of Income Taxes
Paid on Roth IRA Conversion
October 15, 2008
Taxpayer
Refund of overpayment on
recharacterization of Roth IRA
conversion
IRS
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Additional IRA Resources

Books:
−
−
−

Websites:
−
−
−

“Life and Death Planning for Retirement Benefits” by Natalie
Choate
“The Retirement Savings Time Bomb … and How to Defuse It” by
Ed Slott
“Individual Retirement Account Answer Book” by Fleisher, Lippe
and Levy
www.ataxplan.com (Natalie Choate’s website)
www.wealthcounsel.com
www.IRAhelp.com
Training / CLE:
−
“Practice Building Bootcamp” (presented by Phil Kavesh)
−
WealthCounsel’s Two-Day IRA Seminar
79
Additional IRA Resources

Training CDs:
−

Software:
−
−

“IRAs Payable to Trusts” (offered through WealthCounsel)
WealthDocsTM by WealthCounsel
Inherited IRA Analysis by Robert S. Keebler
Newsletters:
−
−
−
“Ed Slott’s IRA Advisor”
“Choate’s Notes” by Natalie Choate
“Employee Benefits and Retirement Planner Newsletter” by
Leimberg Information Services Inc. (e-mail only)
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