Commingle Contributory Roth and Roth Conversion
A 46 year old has a Contributory Roth IRA valued at 3k and a Traditional IRA valued at 50k. We are considering converting about 10k of the Traditional IRA to the Roth IRA. Should we set up a separate Roth IRA for just the converted amount, or is it ok to convert the 10k and put it into the existing Contributory Roth IRA? I wasn’t sure if it complicates things having only one Roth account regarding how the IRS will treat the 5 year clock, or if in the event he makes any withdrawals prior to 59 1/2 because contributory dollars and conversion dollars are treated differently. it would be much easier to have only one Roth, but wasn’t sure if that is the best approach. Thank you!!
Permalink Submitted by mk foss on Mon, 2012-10-08 19:26
Establishing a separate Roth for the conversion amount is a good idea because it makes it easier to recharacterize the Roth if need be. Once the recharacterization deadline has passed, the two Roths can be combined. You don’t need a separate Roth for purposes of the 5-year rule or tracking distributions before age 59-1/2.
Permalink Submitted by Jonathan Sard on Mon, 2012-10-08 19:37
Is the recharacterization the only positive advantage?
Permalink Submitted by Alan Spross on Mon, 2012-10-08 21:56
That’s the only advantage, except possibly using the separate account to keep track of the year and amount of the conversion, since you must hold a conversion 5 years to avoid a penalty if you withdraw the money before 59.5. Of course, you can always just keep a note or the custodian 5498 which will show the year and amount of the conversion.
But even for recharacterization, the custodian will figure the amount of earnings for you if you converted into an existing Roth, and you can still easily recharacterize. The difference is that the earnings result is based on the overall gain or loss of the entire IRA account (13k), not just the conversion dollars. This difference can either work in your favor or against you when you recharacterize.