Trad-IRA Roth Convert & ESOP R/O Into Roth
Contributory Trad-IRA converted to Roth IRA January 2011. Want to confirm NO problem doing a 2nd transaction before end of 2011 to do a Direct Rollover of (none Roth money) from a former employer ESOP directly into a Roth IRA?
Also, I have always maintained separate IRAs for different sources of funds, in order to keep contributory money separate from Rollover money. In the scenario (above), would there be any compelling reasons for me to establish a new 2nd Roth IRA to take receipt of the direct R/O from the ESOP?
FYI: Former employer ESOP will allow R/O of 25% of ESOP (post 1986 a/c balance) each year over the next 4 years, with overall limit of 50%. Former participant is currently age 56.
Appreciate input!
Permalink Submitted by Alan Spross on Thu, 2011-09-22 20:17
There is no problem converting the ESOP directly, just more taxable income for 2011. Converting the ESOP shares to a different Roth IRA account will allow the earnings of each particular conversion to remain separate and any recharacterization decision for either conversion would not be affected by the other conversion. Another potential consideration for a separate Roth IRA for the ESOP conversion could be added creditor protection if the state does not protect IRAs. Rollover IRAs whether TIRA or Roth are protected without limit in the event of bankruptcy, but if the accounts are commingled with contributary IRAs, then the creditor protection for those accounts is limited to 1,000,000 plus inflation. You have kept prior rollovers separate as well and that has the same benefit.
Note that ESOP shares are eligible for NUA, but not until a lump sum distribution can be taken, and in this case that is only possible in the 4th year. It is something to consider when the 4th year arrives. While these annual distributions would invalidate an LSD since they occurred after separation, age 59.5 becomes a new triggering event and NUA might be allowed for the 4th year since age 59.5 may occur in the 4th year. The specific years of these distributions relative to age 59.5 needs to be analyzed if NUA is viable at that time.