Advanced Underwriting Consultants

Ask the Experts – March 24

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client mistakenly rolled over funds from his traditional IRA to his SIMPLE IRA. Is there a way to correct this error without incurring any penalties or tax liabilities?

Answer: Yes, he can later recharacterize the amount as a contribution to another traditional IRA assuming the contribution was made via a trustee-to-trustee transfer and the recharacterization was made by the due date (including extensions) of his tax return for the year in which the contribution was made. Additionally, your client must:

    • Include in the recharacterization transfer any income allocable to the contribution.
    • Report the recharacterization on his tax return for the year during which the contribution was made.
    • Treat the contribution as having been made to the second IRA on the date it was actually made to the SIMPLE IRA.

Also, your client must notify the trustees involved of the recharacterization, and supply the trustees with certain information, including:

    • The type and amount of the contribution to the SIMPLE IRA that is to be recharacterized.
    • The date the contribution was made and the year for which it was made.
    • Directions for the SIMPLE trustee to transfer the original contribution to the trustee of the traditional IRA.
    • The name of both trustees.
    • Any additional information needed to make the transfer.

Form 8606 should be used to report the recharacterization.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.