ROTH CONVERSIONS (Multiple) TOTAL $350K

Submitted by DAVID DAMASKA on Fri, 2014-07-04 01:50

CLIENT WANTS TO CONVERT $350K (100%) OF BOTH HER (2)TIRA A/Cs & HER (2)R/O-IRA A/Cs.

#1 QUESTION (R/O-IRAs)BACKGROUND DETAILS:

1st OF THE 2 R/O-IRA accounts IS STRAIGHT-FORWARD CLIENT’S FORMER EMPLOYER DIRECT T-2-T R/O-IRA. (current value $10K)

2nd OF THESE 2 R/O-IRA accounts HAS 2 ORIGINAL SOURCES OF FUNDS (A & B):
(A) {$27K ON 1/11/2011} qualified direct rollover check processed by Investment Co(FORMER EX-HUSBAND’s 401k Plan CUSTODIAN) for the benefit of the former spouse(MY CLIENT/EX-WIFE WHO INTENDS TO DO THE ROTH CONVERSIONs NOW) who is an alternate payee under a QDRO. Transaction was treated as a qualified direct rollover FROM EX-HUSBAND’s 401k Plan INTO MY CLIENT/EX-WIFE’s PREVIOUSLY/NEWLY ESTABLISHED R/O-IRA (IN HER OWN NAME) TO TAKE RECEIPT OF THIS $27K
&
(B) {$149K ON 11/29/2010} transferred 100% of (FORMER EX-HUSBAND’s R/O-IRA account balance, in–kind, directly into the former spouse’s(MY CLIENT/EX-WIFE WHO INTENDS TO DO THE ROTH CONVERSIONs NOW) R/O-IRA account (IN HER OWN NAME).

THE (2) XRANS (above) ARE ONLY $ EVER INTO (A & B)!
(A & B – current value $250K)

NO $ EVER W/D FROM ANY OF THESE R/O-IRAs!
{CURRENT VALUE OF ALL (above) 1st & 2nd R/O-IRAs $260K!}

QUESTIONs PERTAINING TO (above) FACTS – (R/O-IRAs):
#1 QUESTION:
ANY SPECIAL RULES TO BE AWARE OF SPECIFICALLY RELATED TO ROTH CONVERSION OF FUNDS W/ORIGINAL SOURCE VIA DIVORCE/QDRO (i.e. TIME REQUIREMENTS PRIOR TO ELIGIBLE FOR CONVERSION, etc.)?

(2 TIRAs) Additional BACKGROUND DETAILS:
BOTH TIRAs HAVE TOTAL/AGGREGATE TAX COST-BASIS(NON-DEDUCTIBLE CONTRIBUTIONs) OF $37K.
LAST CONTRIBUTION INTO TIRA A/Cs WAS MADE ON 04/01/2013 (2013 TAX YEAR $5.5K NON-DEDUCTIBLE CONTRIBUTION).
NO $ EVER W/D FROM ANY OF THESE TIRAs!
{CURRENT VALUE OF BOTH/ALL TIRAs $90K!}

QUESTIONs ENCOMPASSING BOTH (2 R/O-IRAs) & (2 TIRAs):
{CURRENT VALUE OF ALL 4 A/Cs (above) R/O-IRAs & TIRAs $350K!}

#2 QUESTION:
CLIENT HAS NO EXISTING ROTH IRA A/C, NOR HAS SHE EVER HAD A ROTH AT ANY TIME IN PAST.
If convert ALL (above) NOW, then anything ANY $ CLIENT W/Ds (whether principal or growth) between now and the end of tax year 2018 would be subject to an early withdrawal penalty, but NOT additional tax?

#3 QUESTION:
As of 1/1/19 (five tax years), the principal plus growth would be available, penalty and tax free?

#4 QUESTION:
ANY COMPELLING REASON NOT TO CONSOLIDATE {BOTH/ALL R/O-IRAs – current value $260K} PLUS{BOTH/ALL HER OTHER 2 ADDITIONAL TIRAs – current value $90K} INTO A SINGLE NEWLY ESTABLISHED ROTH IRA A/C (assuming NO plans to EITHER re-characterize ANY part of RROTH Conversion OR to re-characterize the specific gains/losses and assets associated
with a particular conversion)?

#5 QUESTION:
Asking this question because want to move/transfer ALL $350K to a new investment co. in addition to CONVERTING ALL $350K TO ROTH.
ANY COMPELLING REASON NOT TO SIMULTANEOUSLY CONVERT&MOVE/via DIRECT T-2-T XRANS ALL EXISTING {R/O-IRAs & TIRAs} A/C FUNDs INTO A single NEWLY ESTABLISHED ROTH IRA A/C WITH A NEW CUSTODIAN
vs.
DOING EACH OF THE RESPECTIVE ROTH CONVERSIONs INTERNALLY w/ EACH OF THE CURRENT CUSTODIANs & THEN SUBSEQUENTLY IN SHORT ORDER CONSOLIDATING ALL A/Cs INTO A single NEWLY ESTABLISHED ROTH IRA A/C WITH A THE NEW CUSTODIAN via DIRECT T-2-T XRANS?

#6 QUESTION:
ANY OTHER WORDS OF WISDOM &/or SPECIFIC ISSUES TO AVOID?

FEEL THERE IS ALWAYS SOMETHING TO BE LEARNED FROM OTHER EXPERIENCED ADVISORS, & I CANNOT KNOW ALL, FEEDBACK IS GREATLY APPRECIATED!

BIG D



Submitted by Alan - IRA critic on Fri, 2014-07-04 03:41

  1. When the QDRO funds were rolled over to an IRA, the QDRO penalty exception was lost, but that does not matter if client has reached 59.5. Otherwise, these IRAs are hers in all respects and she can convert to a Roth. However, conversions and particularly large conversions taxable at her higher single rates are probably not a good idea so if she does convert it probably should be in small increments each year so she does not pay higher tax rates on the conversion than she expects to pay in retirement if she did not convert. Also, it is inportant to determine if the acquired any after tax amounts from ex’s 401k because any after tax amounts provide a non taxable portion of a conversion. If ex had after tax contributions, client would receive a pro rated amount of them and add them to her own basis on Form 8606. Re your question, client can convert right away if conversions are advisable. If client is not yet 59.5, the conversion must be held 5 years to avoid a 10% penalty on the taxable share of a conversion if client needs to take a Roth distribution.
  2. Q2 You are correct. If client converted the entire 350k, the taxable portion would be 313k. Any Roth distributions taken before 2019 would be subject to 10% penalty (not no tax) and the taxable portion of 313k would come out before the non taxable portion. If client reaches 59.5 before or during this 5 year period, the 10% penalty no longer applies to distributions after that date. If client only does partial conversions, the taxable amount is pro rated so no matter what amount is converted around 10% will not be taxable.
  3. Q 3 Principal would be available tax and penalty free, but any gains are still taxable until client reaches 59.5. After the LATER of 1/1/2019 or date client reaches 59.5, the Roth is qualified and fully tax and penalty free. Until qualified, the earnings come out last.
  4. Only reason to keep the rollover IRAs (her own and those acquired from QDRO) in a separate Roth is creditor protection reasons and this depends on her state of residence. Most states fully protect IRAs but some such as CA only provide protection for amounts needed for basic living needs. No other reason as the QDRO sourced rollover IRAs are treated in all respects as if they had been client’s own IRAs all along.
  5. Probably better to change custodians first, then convert because recharacterizations will be easier if conversion is done with new custodian.
  6. Am most concerned with converting large amounts in a single year. Does client have other large sources of income? If this is all client has for retirement plus SS, could well be best not to convert at all unless a year comes along where client can convert at a 0 tax rate or perhaps 10% bracket.

Submitted by DAVID DAMASKA on Mon, 2014-07-07 20:28

Alan:Client current AGE only 44.Has plenty of LIQUID/NON-RETIREMENT A/C Cash/Funds to pay the ESTIMATED $90K ish of TOTAL ROTH Conversion TAXES.Client wants to do 100% ROTH Conversion in 2014, because she & her NEW husband (married 2013) will NOT have ANY EARNED INCOME during 2014 tax year, & OTHER income is neglible. BOTTOM-LINE: LOWEST TAX-BRACKET year future PRE-RETIREMENT.NO AFTER-Tax Funds EITHER (A) or (B) R/O IRA A/C Funds.CLIENT is an OHIO Resident, my understanding is that S/B protected, at least up to specified MINIMUM TOTAL MAX $ AMOUNT. Re. QUESTION#1: Are you saying BOTH (A) {$27K ON 1/11/2011} qualified direct rollover FROM EX-HUSBAND’s 401k Plan INTO MY CLIENT/EX-WIFE’s PREVIOUSLY/NEWLY ESTABLISHED R/O-IRA (IN HER OWN NAME)ADDITIONAL INFO: CHECK from Invest CO was payable: “… Invest CO TR IRA FBO: MY CLIENT’S NAME”, point being currently held in IRA in my CLIENT’S NAME & recollection is that EX-HUSBAND’s 401k Plan Custodian segregated HER Funds into A/C in HER NAME prior to R/O into HER IRA A/C.&         (B)  {$149K ON 11/29/2010} transferred 100% of (FORMER EX-HUSBAND’s R/O-IRA account balance, in–kind, directly into the former spouse’s(MY CLIENT/EX-WIFE) R/O-IRA account (IN HER OWN NAME) both done via DIVORCE/QDRO are NOT ELIGIBLE to be CONVERTED until she reaches AGE 59.5?  I previously outlined w/client that may be merit to spreading out over multiple years; however, she wants to do ALL at 1 time, due to VIRTUALLY NO other 2014 INCOME & currently has > enough CASH available to pay Conversion TAXES.FINALLY, she does NOT anticipate needing to ACCESS any of the ROTH Converted Funds during the 5 years SUBSEQUENT to the ROTH Conversion of the $350K, but wanted clarification on TAX IMPLICATIONS, should she want/need to ACCESS some of these funds for starting new business, ETC.THANK YOU VERY MUCH!Big D

Submitted by Alan - IRA critic on Mon, 2014-07-07 22:00

  1. Re Q 1: She can convert anytime and there is no early withdrawal penalty for conversions. However, if she takes a Roth distribution from the converted funds in the first 5 years, she will owe a 10% penalty on the amount that came from Roth conversions because she will also be under 59.5. Conclusion is that she just needs to not touch the conversions until 5 years has passed.
  2. As long as the marginal rate(s) she will owe on joint return will not be higher than what those rates are expected to be in retirement, conversion is fine. Converting in a low income year is also good and it sounds like 2014 will be lower income than future years will be. But 350k is still a large chunk to convert. That said, if the entire amount is converted, after the tax bill is known next spring AND the investment results of the conversion is also known to date, some or all of the conversion can be recharacterized. Her tax bill can then be managed with the benefit of hind sight.

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