Profit Sharing Plan to IRA to Joint account
Scenario: Husband has a PSP in 2013; advisor at that time tells him to transfer plan assets to a new IRA. 20% is withheld from the gross amount; net amount gets transferred into the new IRA. He is getting his taxes done for 2013 and his CPA tells him to take the IRA money out and deposit it into a joint account (w/ wife). QUESTION 1: Wouldn’t it make more sense to convert to a Roth? Reasoning; he doesn’t like paying taxes; doesn’t need the money to live on; no RMD’s required from the Roth; after 5 years earnings come out tax free. QUESTION 2: How do I explain to him that he’s not going to pay more taxes on this money than he should. His question will be why am I paying taxes twice on the same money.
Permalink Submitted by Alan - IRA critic on Tue, 2014-04-08 22:18
First, a direct rollover should have been done to avoid withholding. More than 60 days has now passed and the 20% withheld amount will be taxable, no matter what is done from here. Distributing the IRA or converting it will just result in the other 80% being taxable as well. If he converts he will pay taxes right away, but if he leaves the 80% in the IRA he will gradually pay taxes only as RMDs are taken from the account. There would not be double taxes paid, just questions on whether he pays taxes now (distribution or conversion) or later.