Roth Conversion DETAILS???
Before we pull the trigger on some year-end Roth Conversions, I would like to confirm that my understanding re. following details are correct:
1) If age is > 59.5, then any compelling reason NOT to commingle Roth Conversion funds into an existing Roth IRA account that you have previously made &/or will make future Roth contributions after Recharacterization period ends?
2) Advisable at any age to convert into new/separate Roth IRA account for each account converted until after Recharacterization period ends?
3) No problem to do Roth Conversions for following types of accounts:
SEP-IRA?
Rollover IRA?
4) No problem to do Roth Conversions for multiple accounts in same tax year (SEP-IRA, Traditional IRA & Rollover IRA)?
5) No problem to do Roth Conversion for SEP-IRA, Traditional IRA & Rollover IRA account in the same tax year that you have taken a RMD withdrawal from the same account?
6) No max age limit for doing Roth Conversions?
Appreciate your input & value your knowledge!
Permalink Submitted by Alan Spross on Thu, 2011-12-15 04:18
1) If there is any possibility of recharacterizing, there will have to be an earnings calculation involving the entire account if the conversion is made to an existing Roth. This is not necessarily bad and the custodian will do it, but the investment results of the entire account may be far different than that of just the conversion money. I don’t know that this rises to the level of a compelling reason over the long haul.
2) Probably, unless taxpayer is sure that they will not recharacterize, or just desires simpler and fewer accounts.
3) No problem for either.
4) No limit on number of conversions or accounts funding the conversions. I would do them on different dates however, so each conversion can be identified in the event of recharacterization.
5) Not a problem, but the total RMD for all owned TIRA, SEP or SIMPLE IRA account must be completed before ANY conversion is done (ie ALL RMDs done, not just for the account being converted).
6) No age limit, and no income limit or marital status requirement any longer.
Some high value Roth conversion of rollover IRAs should perhaps be kept separate in states where there is limited creditor protection and taxpayer would fall back on the federal BK law. Rollover IRA assets have unlimited dollar protection whereas other IRAs are limited to 1 million plus inflation bump. If taxpayer will never go over that figure, it does not matter.
Permalink Submitted by DAVID DAMASKA on Fri, 2011-12-16 01:41
Alan:
You truly are THE MAN! I aspire to obtain a fraction of the knowledge that you fire off at will.
Re. No problem to do Roth Conversion for SEP-IRA, Traditional IRA & Rollover IRA account in the same tax year that you have taken a RMD withdrawal from the same account?
I would like to clarify that if we have only taken RMDs for 2011 tax year from client’s R/O IRAs, but also has a SEP-IRA (a/c value included in RMD calculation), but no RMD was w/d from this particular SEP-IRA a/c, then is it ok to convert from any of the R/O IRA & SEP-IRA a/c’s?
If conversion funds go into existing client Roth IRAs, then do I need to check to make sure that the custodian will perfom the earnings calculation in the event of recharacterization, or is this standard procedure these days?
I have another client that is 53 & makes big money. We are going to do total Roth Conversions of about $63K before year-end (2 Traditional IRAs & 1 R/O IRA). He has an existing Roth IRA with one of 2 custodians, which only has about $3K from a Roth contribution made many years ago. Given small existing Roth IRA a/c value & very unlikely that he will need to access any funds from it before age 59.5, it would be easier/cleaner to convert the Traditional IRA ($19K) & the R/O IRA ($6K) into the existing Roth IRA, which is all with same custodian. Great point about the BK creditor protection issue, but although he will eventually have > $1million in IRA a/c’s, this R/O IRA is so small that I lean toward keeping it simple.
Would doing both Traditional IRA & R/O IRA conversions (same custodian) into existing Roth a/c preclude ability to recharacterize (unconvert)?
Is it necessary to establish a separate Roth IRA a/c to take receipt of both Traditional IRA & R/O IRA conversions, which would result in a total of 3 Roth IRAs with the same custodian when the dust settles?
I have a tendancy to overthink things, but if there are good reasons for converting each of these 3 IRAs into separate new Roth IRAs, which will result in a total of 4 Roth IRAs between the 2 custodians, then I will do what needs/should be done.
Appreciate your thoughts!
David
Permalink Submitted by Alan Spross on Fri, 2011-12-16 02:59
All TIRAs including rollover TIRAs, SEP, and SIMPLE IRA accounts must be included in RMD calculations, although the total RMD for each account can be taken from any of them. Before any conversion from any of them can be done, the total RMD must be satisfied from them in any combination. This applies even though it does not matter which account funds the RMDs or which account funds the conversion.
Most all custodians, and particularly large ones will do the earnings calculation, although they are not actually required to. If one refused, they would have to accept the IRA owners figures, which can be calculated from the worksheet in Pub 590 if necessary. It can get confusing if there has been transfers between accounts after the conversion was done and before any recharacterization.
For the other client, to keep things simple, the conversions could be done into the existing small Roth account. You might check with the custodian but the earnings calculation should be no problem for most of them. Probably all driven by entering the opening and closing balance into a computer program.
If you and the client are using a conversion strategy where you will only keep the best performer and recharacterize the other, they should be done into different Roth accounts and invested differently so they perform differently. But if this is just a matter of converting and looking at it as a long term strategy, then the conversions can be done into the current Roth and that would be the only Roth IRA.
If the conversions will be coming from different IRA accounts, they should be done on different days even if going into the same Roth. That way, if the client has second thoughts about his tax bill, the conversions can be easily identified by the amount and the date converted.
No matter what you do, nothing can prevent a recharacterization from being done, either a full one or a partial one.