Disbursement from Ordinary IRA to convert to Roth
Is it permissible for a taxpayer to liquidate a traditional IRA account first, requesting no witholding, then use proceeds to allocate to a new Roth account and categorize it a conversion? If so, what IRS form needs to be submitted with the 1099 that would be issued from traditional IRA custodian where the funds were originally liquidated?
I have a client who is moving their investment accounts over to me and they have a small traditional IRA they want to convert to a Roth. Rather than open a new temporary traditional IRA acct. with my firm and a Roth, I would prefer to only open a new Roth and liquidate the traditional from the prior custodian first and use the proceeds to deposit into a Roth Conversion account.
Please advise,
Thank you
Permalink Submitted by Alan Spross on Tue, 2011-02-22 23:39
No problem at all. A conversion can be done by direct transfer OR by indirect 60 day rollover. They are reported in the same manner on Form 8606 and the 1099R that is issued by the TIRA custodian will also be the same and will look just like a usual distribution would. The 8606 then reports the conversion (rollover) to a Roth IRA. As you indicted, be sure the taxpayer specifies no withholding on the TIRA distribution.
Note that if the client has any basis in any of his TIRA accounts, Form 8606 computes the taxable amount of the conversion as well using the pro rate rules.
Permalink Submitted by mk foss on Tue, 2011-02-22 23:45
There are a couple of ways to accomplish what you desire. The IRA owner can withdraw the funds and deposit the check into a new Roth account with a new custodiab This must be accomplished within 60 days of receiving the check. This presumes that it is a traditional or rollover IRA and not an inherited IRA (which cannot be converted to Roth). Also if there’s been a rollover within the 365 days ending with the withdrawal date, this could be a problem.
The next choice is for him to open the new Roth account with hte new custodian and ask that the previous IRA be transferred into the Roth. There is no 60 day limit with this approach.
It’s not necessary to move an IRA from one custodian to a new one before the Roth conversion – some may want to do that for ease of recharacterization.
Permalink Submitted by Peter Lingane on Wed, 2011-02-23 20:30
Mary Kay’s suggestion to transfer the traditional IRA at custodian 1 to a Roth IRA at custodian 2 is the safer approach. A rollover involves unnecessary risk.
Permalink Submitted by James Claiborne on Wed, 2011-02-23 21:59
Thank you for your replies, your input has been very helpful.