Commingling multiple Roth Conversions with a Contributory Roth

Submitted by David Etheridge on Tue, 2021-10-26 19:20

1. Would it be easier to set up a separate Roth account to convert IRA assets over several tax years and recharacterize each conversion as it hits the 5 yr mark into the contributory Roth? Will the custodian calculate the growth on each conversion amount?

2. Or to do the conversions directly into the contributory Roth? Will the custodian be able to track the conversion and growth based on the tax years it was converted?

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Permalink Submitted by Alan - IRA critic on Tue, 2021-10-26 20:01

Having multiple accounts is not necessary. You only have to track the amount of your conversions each year and most people do that with a spreadsheet or simple tally sheet. That’s simple than trying to keep track of multiple different accounts that have no effect on the Roth distribution ordering rules, which treat all Roth as one combined Roth IRA. Gain or losses in a Roth IRA are not tracked separately whether they come from regular contributions or conversions. At any point in time your gain is only the amount by which your total account balance exceeds your Roth basis.
Custodians do not track growth or basis. That is up to the taxpayer, and there is no need to track growth. Once you have withdrawn your basis, the rest would be earnings and taxable until your Roth is qualified. Most people do not tap their Roths until they are qualified at 59.5 and 5 years, and at that point tracking is no longer needed since all Roth accounts will be totally tax free.
You can track your Roth basis by keeping all your Form 5498 forms. A 5498 is issued reporting each year’s regular and conversion contributions, so if you keep them you will know your basis. Of course, if you do take a non qualified distribution, you will have to reduce your regular contribution balance to subtract the distribution, or the conversion balance (oldest conversion first).
You also get a 1099R reporting each conversion and you will have to file an 8606 to report these conversions. Your prior tax returns or 1099R forms provide further documentation of distributions you took or conversion you did for each year. If you update your records once a year to reflect any changes, that should take about 10 minutes. But if you let several years go by without updating, then you will have considerable research to do if you ever take a non qualified distribution. It’s pretty common for people to fall way behind on their recordkeeping, or purge and misplace the 5498 or older returns that contain the data you need.
In short, creating additional accounts is not necessary, and would likely only increase paperwork and forms relative to simply keeping one Roth account and updating your basis each year.