Blogs - Ask Ed Slott
Ask Ed Slott: IRA Recharacterization Limit?
Friday, April 25, 2014
Partner Insights

I converted a regular IRA into a Roth IRA.†When doing my tax return, I found that this put me into a higher tax bracket so I recharacterized part of the conversion to what I thought put my taxable income back into the lower tax bracket. However, I now find that the amount I recharacterized was not large enough. Can I recharacterize some more of the conversion to get my taxable income low enough to put me in the lower tax bracket?

Yes. There is no limit on the number of recharacterizations that you can do. You can recharacterize some or all of the remaining conversion amount back to an IRA. You must attach a note to your federal income tax return to explain the recharacterizations.

I'm 54 and collecting disability and a small pension. I have a rollover IRA for which I've been told that I can not add any money to unless it is "earned income." Is this a true statement and if so are there any workarounds?

You must have earned income (compensation) from working to be able to make an IRA contribution for the year. Disability income and pension income are not considered compensation, so you canít make an IRA contribution based on those amounts.

I am considering purchasing several annuities with the money in my SEP IRA. I want to keep the annuities in my IRA. Can I do this? I do not want this to be considered a distribution of the money and therefore cause a major tax problem.

You can invest your SEP IRA funds in a variety of investments, including annuities. Simply find a financial institution that offers IRA annuities (sometimes called qualified annuities) and transfer your IRA funds to that IRA annuity. An important point to keep in mind is that your IRA must purchase the annuity.

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(2) Comments
Re annuity purchase question - I interpreted it to be asking whether annuity distributions could be kept internal as opposed to being paid out to the participant. In the latter case the distributions are, of course, treated separately for RMD purposes and the participant ends up having to take the annuity distribution and an RMD from the non-annuity assets, a total which can be substantially greater than the RMD derived from the total value of the IRA. I've occasionally used annuities within IRAs as fixed income surrogates, and have run into this issue. Some insurers have permitted me to "trap" the distributions, so I presume it is legally permissible, others have not.
Posted by Steve D | Friday, April 25 2014 at 12:43PM ET
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Posted by brad s | Friday, April 25 2014 at 5:33PM ET
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