re: Roth IRA conversion…
Typically, is the recommendation to convert Traditional IRA $ to a NEW Roth IRA or is it OK to use an EXISTING Roth IRA? I have a 65 year old client that has both a Traditional IRA and a Roth IRA…deciding whether to use the existing Roth IRA or keep seperate. If we use the existing Roth IRA for the conversion, how does the IRS know what is the contributory portion and what is the conversion portion (with the 5 year penalty period)?
Permalink Submitted by Alan Spross on Thu, 2009-07-23 21:45
The 5 year holding period for conversions stops at 59.5, so client does not need to worry about that, but the IRS knows the breakdown because the 5498 issued by the Roth custodian separates regular contributions from conversion contributions.
Using a new Roth vrs converting into the current one is only an issue with respect to recharacterization earnings calculations. If a new Roth is used, there is no calculation needed and a recharacterization just releases the entire account balance back to the TIRA. If the existing Roth is used, the calculation must include the investment results of the entire account, not just the converted assets. Therefore, the amount already in the account vrs the amount of the conversion will affect the overall results. If the prior amount does better, a higher amount of the conversion would go back, if the converted asset does better, then a lower amount will go back to the TIRA. These unintended results can work either to the taxpayer’s advantage or disadvantage, but there is less control over the actual conversion experience.
Now if the entire account is in CDs or money market fund earnings the same return, it does not matter. Otherwise, the converted amount can have a wildly different investment result than what was already in the account.