Divide up IRA before converting to Roth IRA?
Hi Members,
I listened to a recent recording of Jim Lang’s Money Hour (The Lange Money Hour Archives
June 2, 2010 – Jim discussed Roth IRA conversions with Lange team member Steve Kohman). Web site: retiresecure.com
They mentioned dividing up an IRA and then converting each slice to a Roth IRA. I did not do this. Instead, I just converted part of a larger IRA into separate Roth IRAs. (Sliced up a big IRA into smaller Roth IRAs which hold different asset classes that were in the larger IRA). Now I am worried that I should have sliced up the original IRA into separate IRAs before converting each one. Should I have sliced up the IRAs first? The books I read did not mention it.
I can of course track all the transactions and I am ready to recharacterize some of the Roth IRAs back into IRAs in the fall.
Thank you.
ohgriffith
Permalink Submitted by Alan Spross on Tue, 2010-07-06 22:31
If you are going to recharacterize all or part of your conversions, then you must be sure not to reconvert the same amount without completing the waiting period required. While the IRS does not often request documentation that you did not reconvert the same amount, if they do ask it is easier to trace the recharacterized funds if they go into a separate TIRA account. This separate TIRA account can be established either up front (Lange suggestion) or at the time of the recharacterization. I guess setting up the separate IRAs up front means you don’t have to think about it later, and that is the only apparent advantage.
But even if your recharacterizations all go back into your single source IRA, it does not mean that you cannot develop documentation to show that there was no disallowed reconversion done or that any subsequent conversion was a conversion of a different amount than you recharacterized. If you single source TIRA is large enough to have funded all the conversions, then there is no problem. For example if you have a balance of 500k and convert 200k, even if you recharacterize all your conversions, you have another 300k (unless losses reduce it below 200k) to fund additional later conversions whether you recharacterized earlier conversions or not.
Permalink Submitted by O Hayes Griffith on Tue, 2010-07-06 23:48
Dear Alan,
Thank you for your quick reply. I appreciate your help.
Yes, I can document all IRA to Roth IRA conversions. I do not plan to do any recharacterizations until all Roth IRA conversions are made. That way I can verify that I have not violated the rules. I may go ahead and divide up the remainder of my IRA (TIRA or traditional IRA) into slices before any more conversions to Roth IRAs just to see how this works. As you wrote, it does not seem necessary.
Permalink Submitted by Alan Spross on Wed, 2010-07-07 01:14
Remember that it is your decision which TIRA account receives your recharacterized funds. Don’t assume that the Roth funds must go into any particular account. Also, an unrelated but important issue is quality control of your beneficiary designations on all these accounts. Custodians have been known to make errors in interpreting instructions for beneficiary designations. Of course, this is much simpler if you intend to have the same designation on all your IRAs of both types, but you still need to verify that newly created accounts reflect the correct beneficiary.
Permalink Submitted by O Hayes Griffith on Wed, 2010-07-07 03:14
Dear Alan,
Right. The funds are at Vanguard and I have checked the beneficiary designations. Vanguard carries over the same beneficiary choices as its default option, which is what I wanted. By the way, I should add that Steve Kohman and Jim Lang were not making a major point of dividing up the IRAs before doing Roth conversions, they just mentioned this in passing.
Thank you.
Permalink Submitted by Alan Spross on Wed, 2010-07-07 18:46
OK, thanks for the clarification. It’s possible that they have another benefit in mind for the partitioning than my presumption, so if you find out what it is please post it. Thanks.