Roth IRAs & Other Misc. Questions

Submitted by Jason Hochstadt on Thu, 2018-07-05 00:49

Good Evening,

1. For a Roth IRA conversion, I assume the value included as taxable income is the FMV on the date the conversion takes place. I assume this amount is reported on the 1099-R regardless of investment type (e.g. mutual fund; ETF; stock; bond; etc.) and such information is maintained by the custodian. Anything incorrect regarding the above?

2. In light of the elimination of Roth recharacterizations, is there any reason NOT to combine all Roth Accounts together – whether (a) contributions only and/or (b) conversions only? Does it matter if the Roth IRA from contributions only is more or less than 5 years old from the year of initial contribution?

3. I’ve read conflicting information on whether a back-door Roth IRA may be done (a) via immediate conversion from non-deductible IRA contribution or (b) must wait 12 months between the 2 to avoid the step transaction doctrine. Which is correct?

4. Is it possible to utilize either a (1) Conduit Trust or (2) Accumulated Trust as a non-spouse beneficiary of an HSA for a child/minor? Or is this only applicable to IRAs?

5. Can a NJ IRA owner establish a Dynasty Trust that is either a (1) Conduit Trust or (2) Accumulated Trust for a non-spouse beneficiary (e.g. child) in a state like NV to avoid State income tax [assume a pre-tax IRA]?

6. Finally, is it possible for an Inherited Traditional IRA to be used for fee debit purposes for an individual’s other IRAs that are not Inherited?

Thank you!

Jason



Submitted by Bruce Steiner on Thu, 2018-07-05 03:23

  • 5.  New Jersey will tax a trust created by a New Jersey resident unless there is no trustee in New Jersey, no real or tangible property in New Jersey, and no New Jersey source income.  Pennoyer v. Director, 5 N.J. Tax 386 (1983), https://scholar.google.com/scholar_case?case=8309383732823628868&q=pennoyer+v.+director+5+N.J.+tax+386&hl=en&as_sdt=4,31 Potter v. Director, 5 N.J. Tax 399 (1983), https://scholar.google.com/scholar_case?case=13618455055916841807&q=potter+v.+director&hl=en&as_sdt=4,31 .  It doesn’t matter where the trust is created.  The New Jersey resident can create the trust in his/her Will.  New Jersey repealed its rule against perpetuities, so the trust can last forever.
  • Conduit trusts rarely if ever make any sense.  All of the IRA distributions are thrown into the beneficiary’s estate and are exposed to the beneficiary’s creditors and spouses, thus destroying the protection of the trust.  See my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  https://www.kkwc.com/wp-content/uploads/2015/04/AR20041209132954.pdf .

Submitted by Alan - IRA critic on Thu, 2018-07-05 15:18

  1. Basically correct, although if the IRA owner has IRA basis documented on Form 8606, the Box 2a amount is overridden by the 8606 calculation and taxable income will be reduced accordingly.  In addition if an IRA annuity with extensive fringe benefits is converted, the taxable amount may be higher than the cash value of the IRA annuity on the day of conversion.
  2. No reason not to combine the Roth accounts since for tax accounting purposes all Roth IRAs are treated as a single Roth account. Although regular Roth contributions can still be recharacterized, they are not large enough to warrant keeping a separate Roth to receive new regular contributions.
  3. The back door Roth was approved by Congress in 4 footnotes to the Conference Committee Report regarding the TCJA tax legislation. Therefore there is no reason for any waiting period before converting the non deductible TIRA contribution.
  4. Q 6 – IRA fees can only be directly paid from IRA accounts of the same type. Only fees allocated to a TIRA balance can be paid from a TIRA account, however there is no specific guidance on whether the fees for all TIRAs can be deducted from inherited TIRAs. If the custodian allows it, the IRS would likely not contest it.

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