Transfer of Allocable Earnings

One of the more difficult aspects of recharacterization for taxpayers to pick up on is the fact that if you recharacterizes a contribution or a Roth IRA conversion amount you must include in the transfer any earnings allocable to the contribution or conversion being recharacterized according to Reg. Sec. 1.408A-5.

If you recharacterize a contribution you must include in the transfer any earnings allocable to the contribution. If there was a loss, the amount transferred must be reduced by the amount of the loss. In most cases, the amount of the earnings that needs to be transferred is determined by the IRA trustee or custodian.

If you have a transfer agent as inept as Mass Mutual for example that lacks the professional acumen to calculate earnings on recharacterizations you may determine the amount of earnings allocable to an IRA contribution and the total amount to be recharacterized by following these steps:

Step 1: Determine the amount of the IRA contribution to be recharacterized.

Step 2: Determine the IRA’s adjusted closing balance which is the IRA’s fair market value at the end of the “computation period” plus the amount of any distributions, transfers, and recharacterizations made from the IRA during the computation period.

The computation period is the period beginning just before the time the particular contribution being recharacterized is made to the IRA and ending just before the recharacterizing transfer of the contribution.

Step 3: Determine the IRA’s adjusted opening balance.

The adjusted opening balance is the fair market value of the IRA at the beginning of the computation period plus the amount of any contributions or transfers (including the contribution that is being recharacterized under Code Sec. 408A(d)(6) and any other recharacterizations) made to the IRA during the computation period.

Step 4: Subtract the adjusted opening balance in Step 3 from the adjusted closing balance in Step 2.

Step 5: Divide the amount in Step 4 by the adjusted opening balance in Step 3, and enter the result as a decimal rounded to at least three places.

Step 6: Multiply the amount in Step 1 by the decimal determined in Step 5. This is the net income attributable to the contribution to be recharacterized.

Step 7: Add the amounts in Step 1 and Step 6. This is the amount of the IRA contribution, plus the net income attributable to it, to be recharacterized.

In accordance with Circular 230 Disclosure