403b to Roth?
I have a client with a two-tiered 403b annuity. In order to get the maximum payout, he has decided to do a 5 year certain annuitization. If the annuity company will allow (and I think they will), can he annuitize into a Roth IRA? (He’s 70, not working but that shouldn’t be considered a regular contribution). If not, could he do so if he first reregistered the 403b as an IRA? If he can, does he have to pay taxes from outside funds – would have to roll over entire amount I think and if that’s true he wouldn’t be able to have taxes withheld on transfers from this account to a Roth.
Permalink Submitted by Alan Spross on Tue, 2008-08-05 00:26
The RMD amount due each year would have to be determined, and then amounts in excess of the RMD could be rolled into a TIRA and converted to a Roth IRA. The amount of the RMD would depend on whether the starting date of the annuity was before or after the RBD and if the payout was on a joint and survivor basis with spouse etc. Here is a link to the annuity and DB plan RMD regs that contains associated rules:
http://www.irs.gov/pub/irs-irbs/irb04-26.pdf
It might also be possible to have the annuity payout split and the non RMD portion directly converted to a Roth IRA by the 403b plan, avoiding a TIRA entirely. SInce this provision is new this year, the plans are probably not ready to commit to this until they receive all the IRS guidance required.
The taxes for any Roth conversion are better paid from non retirement funds, although it is also possible to withhold the taxes from the TIRA and convert the difference.
Permalink Submitted by [email protected] on Tue, 2008-08-05 14:35
If he initiates a 5 year payout from TSA to Roth, that more than satisfies RMD and he’ll be 1099’ed on entire amount. Don’t see why we have to separate out RMD amounts IF we can roll directly to a Roth, which you indicate is okay these days. If we have to move assets in excess of RMD into a TIRA first, then I understand the logic.
Are you saying RMD amounts can’t be rolled into a Roth? That wouldn’t seem too fair since younger folks not yet subject to RMDs can move entire accounts of qualified moneys to Roth (after paying the taxes). And they don’t have to worry about RMDs once the money is in a Roth.
Permalink Submitted by Alan Spross on Tue, 2008-08-05 22:16
A Roth conversion is actually a distribution and rollover, and an RMD is not eligible for rollover. If an RMD amount is converted or otherwise rolled over, the RMD is considered to have been taken, but the rollover is considered an excess contribution to the IRA or a failed conversion in the event of a Roth conversion. The failed conversion then must be corrected to avoid excise taxes, in the same fashion as an excess regular Roth contribution.
Any taxpayer who wants to convert once they reach the year they turn 70.5 must first take their RMD, and then transfer an additional amount of their choice to a Roth IRA. Both distributions would of course be taxable.