Are separate Roth Accounts necessary for each Roth conversion?
Is there any compelling reason to establish and maintain new Roth IRA accounts at a custodian each time one does a Roth conversion from a deductible or non-deductible traditional IRA to a Roth IRA? Prior to the changes with the new tax law, there seemed to be at least two reasons why one would want to open and maintain a new Roth IRA account for each conversion from a deductible or non-deductible traditional IRA to a Roth IRA. The reasons were as follows:
1) Having each conversion in a separate Roth IRA would facilitate the recharacterization of the conversion should the value of the account decline after the conversion.
2) Because each conversion has its own five year aging clock, it would make accessing the money in the accounts easier and cleaner if each conversion had its own account and thus allowed the owner to know the exact age of each Roth conversion should he/she wish to access the money before age 59.5.
Assuming the owner will not be getting at the funds in the Roth IRA until after age 59.5 and all the conversion money (principal, maybe not all the earnings) will have aged five years by the time the person accesses the money, does it make any sense to maintain a separate Roth IRA account for each conversion from a deductible or non-deductible traditional IRA to a Roth IRA? If the answer is it is not necessary to maintain separate Roth IRAs, then would it be advisable to combine all six or so of the person’s existing separate Roth IRAs into one Roth IRA? And, if so, does it matter which account is chosen to be the one to receive all the funds from the other Roths?
Thank you
Permalink Submitted by Alan - IRA critic on Tue, 2019-08-20 23:07
No reason not to combine the Roths (by direct transfer of course), and this can be done into any of the existing accounts. However, since it is always possible that a non qualified distribution would be needed prior to 59.5, they need to keep track of their Roth IRA basis. The categories they need to track are the total regular contributions they made (less any distributions therefrom), the conversions done prior to 2015, and the conversions done each year since by year. No need to track earnings. Having this info available will allow them to know the tax impact of any distributions they take, and also enable them to correctly report those distributions on Form 8606. Once they reach 59.5 and also 5 years has passed from the year of their first Roth contribution, they will no longer need this info and will no longer have to use Form 8606 to report distributions.