3 Questions Please
A client asked the following items for guidance; if you can help please. Some of it may be very evident, but some not. Thanks for your help in advance.
1. “A client age 60 has $300,000 in a 401k and wants to form two IRA accounts and a ROTH IRA too. He moves $75,000 to a ROTH, pays the tax on that from a non-qualified account, and sets up two IRAs for the balance.” [i][b]What are there ramifications for this if there is enough information given?[/b][/i]
2. “Can he contribute his RMD’s from his IRAs into the ROTH IRA within the 60 day window since they are post tax dollars then added, and thus allowing him a larger than the $5,000 annual ROTH IRA contribution.” [b][i]My opinion is that any amounts distributed to satisfy the RMD rules do not qualify for tax-free rollover treatment. Or is this applicable in this question. Also, my opinion is that a limit is set for Roth contributions, so that would cap at $5,000 or $6,000 for the catch-up provision if applicable?[/i][/b]
3. “It is clear that each year he could convert added transfers from his IRA accounts to the Roth but does his time for the five year wait reset to the date of each new contribution? Opinion of writer: I think it does not.” [i][b]I am not sure how this aspect works for IRA to Roth conversions.[/b][/i]
Thanks, again, in advance for your help.
Ray
Permalink Submitted by Alan Spross on Fri, 2011-08-26 22:02
1) This is easily done by 3 direct rollovers if the plan administrator will execute that many. If not, then reduce the number of rollovers and create the additional IRAs by transfer from the IRAs.
Where this gets convoluted is when the client has after tax contributions in the 401k and desires to “isolate” them only to the Roth conversion. That creates other complications that I will not go into here
unless you are interested in that situation.
2) Once balances are in the TIRA, RMDs cannot be rolled into a Roth IRA because RMDs are not rollover eligible. In addition, if client wants to do additional Roth conversions, he must take out his RMD before doing those conversions because the first distributions taken in an RMD year are deemed to be RMDs up to the RMD amount. If client has earned income for the year, he can make regular Roth IRA contributions to his Roth account regardless of the prior variables. The regular Roth contribution limits are as you indicated and not affected by any conversions done in the same year.
3) Since client is evidently RMD age, the 5 year waiting period for Roth conversions to avoid a penalty no longer applies. It effectively ended back at age 59.5. However, there is still a 5 year waiting period for EARNINGS generated in his Roth IRA to be qualified for tax free distributions. This 5 year period starts 1/1 of the first year he opened a Roth IRA. Until that 5 years is up, any distributions taken are NOT considered to come from earnings until all other balances have been withdrawn. Therefore, in most cases these earnings would never be taxable.
Permalink Submitted by Raymond Khan on Sat, 2011-08-27 00:33
Thank you very much for the info. I was sure on some but not the other.
Ray