roth conversion
Hi. Have a client, CEO of a small company, who wants to do an IRA to Roth conversion of some non-deductible IRAs. The company had a SIMPLE IRA until this year, when I put in a 401k. We are moving his SIMPLE dollars to the 401k.
Clients CPA says we can’t do the conversion this year, because if we move the SIMPLE dollars to the 401k, you have to wait a year before doing a Roth conversion on other dollars or the SIMPLE dollars will still count against you. The SIMPLE to 401k has to age a year, in other words.
Is that correct? I thought the proportional rule on IRAs was based upon account balances as of end of year, and no aging was required when you moved some money to another category, like the SIMPLE to 401k.
Any help would be appreciated.
Richard
Permalink Submitted by Alan Spross on Wed, 2012-08-22 19:33
You are correct and the CPA is incorrect. The only waiting period involved here is the 2 year waiting period to transfer money out of a SIMPLE IRA. Otherwise, the conversion can be done before or after the rollover to the 401k. The 12/31 balances are entered on Form 8606 if Part I is required to report the conversion.
Client may still have some earnings on the non deductible contributions that would be taxable when the account is converted.
Permalink Submitted by Richard Stumpf on Wed, 2012-08-22 20:18
That’s what I thought. We already have basis and gain info on the non-D IRAs, so we have that part handled.
Can you give me some kind of reference that I can pass on to the CPA? This CPA is actually doing the 8606 already, but doesn’t think we can do the conversion.
Permalink Submitted by Alan Spross on Wed, 2012-08-22 21:13
There wouldn’t be a reference to a waiting period that does not exist. If there were a waiting period for a conversion, the tax code would specify it.
Perhaps the CPA is thinking of the waiting period for a reconversion. A reconversion is converting an amount the second time that was recently recharacterized, and that waiting period is spefically outlined on p 28 of Pub 590. But you did not mention the client having already recharacterized a former conversion of this IRA.
Another waiting period that does exist is the one year limitation on rollovers from the same IRA or from an IRA that received a rollover. However, a conversion is totally exempt from this waiting period. Per Pub 590, p 60, “Conversions” it states: “However, the one year waiting period does not apply”.
I think the CPA is probably thinking of one of the above limitations, but they do not apply to this situation unless client did an earlier conversion and recharacterized it.
Permalink Submitted by Edward Czapor on Thu, 2012-08-23 02:16
The CPA is possibly confusing the SIMPLE trustee-to-trustee transfer or rollover to the 401k as an outstanding rollover that would be included in line 6 of Form 8606. The note in the instructions for line 6 of Form 8606 states: “Do not include a rollover from a traditional, SEP, or SIMPLE IRA to a qualified retirement plan even if it was an outstanding rollover.”
Ed C.