Restrictions on converting-to and combining RIRAs
Hi, I’ve read Pub 590 and viewed many helpful posts on this website, but I’m still uncertain about any timing restrictions etc. concerning converting-to and combining RIRAs that may be similar to restriction on TIRAs. Any help with the following questions will be greatly appreciated.
Ques-1
At my credit union, for tax year 2007, I contributed 4k to a RIRA on 4/11/08 which I later recharacterized to a TIRA on 10/15/08. Now, for tax year 2008 I would like to convert this back to a RIRA which obviously has to be done by 12/31/08. Can I do this by just waiting 31 days or must I wait until 2009?
Ques-2
If I make the above RIRA conversion into an existing RIRA (same institution), can I then rollover/combine this RIRA with another new or existing RIRA at another institution in 2008 ?
Ques-3
I also have (what Fidelity is titling a ROLLOVER IRA) which was a trustee-to-trustee transfer from my 401(k) back in 2005. I would like to add/transfer another 20K to this TIRA from my 401(k) and then convert this to a RIRA in 2008 as well. Can I make the transfer and then convert, or should I convert the two separately?
In essence, I’m trying to convert and/or combine 4 different amounts into one new RIRA at a new institution all in 2008:
– The 4K TIRA (recharacterized on 10/15/08 ) at my credit union
– The existing RIRA at my credit union
– An existing IRA at Fidelity
– A partial disrtibution from my 401(k)
I will attempt to accomplish each of these through trustee-to-trustee transfers.
Thanks in advance for any help.
Permalink Submitted by Alan Spross on Tue, 2008-11-18 20:38
1) You can do it now because it was originally a 2007 conversion and you have already waited the 31 days.
2) Yes, but if do that and then decide to recharacterize the 2008 conversion before next October, your earnings calculation is going to be a real mess, and the new custodian may refuse to undertake the calculation. You may want to avoid this potential problem by directly transfering the TIRA to the new custodian first and then ordering the conversion from them. It is generally best to convert into a new Roth since that eliminates the earnings calculation problem if you want to later recharacterize.
3) This ties into the previous question. Why don’t you roll over the entire balance of the 401k (unless you have NUA potential from employer stock)? Then you can convert as much as you wish, although doing all these conversions in a single year may inflate your tax bracket.
An employer can now do a direct Roth rollover as of 2008 as long as your income is not over 100,000. As of this year, an employer plan can be converted directly to a Roth IRA if your income permits. Whatever you decide, you should start pursuing the employer plan now, because transfers out of these plans take time and you want to avoid getting this caught up in the Holiday rush.
I appreciate your intent to consolidate these plans into one IRA and direct transfer is the way to do it. The only trade off in doing that is that it makes an earnings calculation confusing if you want to later recharacterize any or all of the conversions.
Permalink Submitted by Drew Blazak on Tue, 2008-11-18 22:47
Mr. Oniras, thanks for your prompt and knowledgeable reply.
Allow me to post a follow-up question: Since 1 of the 4 amounts I want to combine is already a RIRA, would it simplify the earnings calculation to keep the other 3 separate from it? That is; open a new TIRA, say at Vangard, then do a non-taxable rollover of the 2 existing TIRAs and the partial distribution from the 401(k) into this new TIRA, then have Vangard convert this combined TIRA to a RIRA; keeping the existing RIRA separate and not combining them until after 10/15/09.
Also, if I do it this way, do I lose the ability to recharacterize the 3 amounts separately, or will I be able to a partial recharacterization?
Thanks again
Permalink Submitted by Alan Spross on Tue, 2008-11-18 23:12
Yes, your transfer plan would work. The 401k portion should be done by direct rollover to avoid withholding. I hope the CU will do a trustee to trustee transfer to help keep your rollover options open. The 401k direct rollover is what will take the time to complete, so you should start the paperwork ASAP. The conversion would be last, and it needs to be done by year end. Technically, the distribution for the conversion needs to be taken by year end, but there is actually 60 days available to fund the Roth and still have it count for 2008.
Following your plan, you can still recharacterize your conversions separately, each one in full or partial. However, the earnings calculation for each conversion will be different unless they are all done on the same day. In other words, the % of earnings for each conversion would be influenced by the combined results in the conversion Roth. If you had a different Roth account for each conversion, then there would be no need for a calculation because the account balance less the converted amount would be the earnings figure.
Permalink Submitted by Drew Blazak on Tue, 2008-11-18 23:50
I’ll be on the phone first thing in the morning.
Once again, thank you for your prompt and insightful response. The members of this forum are indeed fortunate to have someone as knowledgeable and responsive as you to answer their questions.