Over year-end Roth conversion
Client is attempting to convert part of a qualified plan to a Roth, but the plan sponsor can’t get their act together to distribute the funds timely enough to get them to the Roth prior to year end. If the distribution happens in 2009 and the funds hit the Roth in 2010 (well within the 60-days), how is it reportable for tax purposes? Is it a distribution for 2009 tax purposes, with an 8606 reported in 2010? Could the conversion be counted in 2009 (though the funds don’t hit the Roth until 2010) — I’d really like the 5-year clock to start ticking in 2009 and NOT in 2010? Thanks!
Permalink Submitted by Alan Spross on Tue, 2009-12-08 00:17
As long as the distribution occurs in 2009 and is reflected on a 2009 1099R, the Roth rollover can be completed within 60 days. I can’t tell if the client plans a direct Roth conversion, taking a distribution which he intends to convert himself, or wants to first deposit the funds in his TIRA and convert from there. In any event, even though the conversion would be reported in 2009 if the distribution was in 2009, the 5 year clock only starts to run for conversions when the Roth is actually funded. That means a 2009 taxable conversion could become a 2010 conversion with respect to the 5 year holding period.
Form 8606 is only used to report a conversion from another IRA, not from a qualified plan. Also, a direct rollover would be required if the client wishes to avoid 20% withholding on the distribution. There are also some complex issues if the client has any after tax dollars in the qualified plan and where they will be directed.