Roth conversion wrinkle
I have traditional IRAs with Third Avenue Funds group and with the Torray Fund. I started to convert them, trustee to trustee, to new Roth IRA with Vanguard. The Vanguard person consulted a list he had and informed me that Third Avenue Funds, like many other mutual fund families, does not allow trustee to trustee conversions from their traditional IRA to another fund family’s Roth IRA. Vanguard said that this problem is easily circumvented by doing the transfer into a traditional IRA with Vanguard and then almost immediately (by phone) having Vanguard do an internal conversion to its Roth IRA.
I recognize that Vanguard’s solution will work, so I am not too exercised. What surprised me, however, was that Third Avenue Funds, and presumable many other fund families, have the right to forbid transfers out directly into a Roth IRA at another fund family. Are Third Avenue, and the others, legally within their right to forbid a transfer directly to Roth IRA elsewhere?
Permalink Submitted by Alan Spross on Sat, 2010-09-25 19:56
Yes, they can refuse a transfer. A direct transfer is a tax code requirement for a qualified retirement plan per Sec 401(a)(31), but not for IRA custodians. Their only incentive to offer direct transfers is to maintain good PR with the public. While a Roth conversion or other rollover can be done by indirect 60 day rollover, the problem is that the one rollover rule is affected over a 24 month window. You have to look back 12 months to see if you can do it, and if so then you are restricted for the next 12 months. If these companies will not transfer to a Roth IRA, they probably also will not transfer to another TIRA account either. In some cases this probably discourages the customer from moving the funds and they are rewarded as a result. I have also heard cases of fund companies referring to tax withholding in a manner that leaves the impression that it is mandatory for an IRA distribution, without actually stating that. Of course, a Roth conversion does NOT count for purposes of the one rollover rule.
And with an indirect rollover you are also out of the market for a number of days.
Permalink Submitted by Douglas Broome on Mon, 2010-09-27 13:40
Pursuing Alan’s caution: If the current trustee also will not allow a trustee-to-trustee transfer to a traditional IRA (in addition to forbidding one to a Roth IRA elsewhere), that means that I must take the distribution by check and make certain that I send it to another IRA elsewhere within 60 days. Two questions: Will my forcibly receiving the funds from the current trustee (Third Avenue) require withholding of 20 percent for income tax? (2) If my second current trustee also will not allow trustee to trustee transfers, also requiring me to take possession of the IRA en route to the IRA with the new trustee, will that violate the once-per-12-months rollover role?
Permalink Submitted by mk foss on Mon, 2010-09-27 17:34
The 20% mandatory withholding does not apply to IRAs; taxes are withheld from IRAs upon request only.
Permalink Submitted by Jose Morales on Mon, 2010-09-27 17:37
[quote=”[email protected]“] (2) If my second current trustee also will not allow trustee to trustee transfers, also requiring me to take possession of the IRA en route to the IRA with the new trustee, will that violate the once-per-12-months rollover role?[/quote]
The 1 rollover per 12 months rule is set by the IRS and does not get waived simply because the custodian you chose to invest your IRA with has restrictions on transfers. If you have opened an IRA with a custodian that does not allow transfers then you are only going to be able to move that IRA after the 12 month period has passed.
Permalink Submitted by Alan Spross on Mon, 2010-09-27 22:28
More directly, if you indirectly roll over IRA A to IRA B, you cannot do another rollover from IRA B for 12 months because it received a rollover from another IRA. The 12 month period is measured from the date of distribution for the first rollover.
Say you distribute from A on 2/1 and roll it to B on 4/1. You cannot do another indirect rollover from either A or B until 2/2 of the following year.
Permalink Submitted by Douglas Broome on Tue, 2010-09-28 01:29
A rollover from IRA-C to IRA-D is, however, totally unaffected, if I understand correctly.
Doug.
Permalink Submitted by Alan Spross on Tue, 2010-09-28 02:05
Right.