Roth conversion vs. IRA rollover
The client does not need $45,000 of the 2020 IRA RMD which was taken shortly before the CARES Act in March. She would like to roll some back to her IRA and do a Roth conversion with the remainder. My understanding is that she has until 7/15/ 2020 to do either or both. I am correct? Before doing this, I just wanted to check that I did not miss something.
What brokerage form do we use for the Roth conversion? The money is not coming from the IRA but is in the trust.
Many thanks as always ……. Mary Dean
Permalink Submitted by Alan - IRA critic on Tue, 2020-05-05 23:24
Yes, you are correct, assuming that client has a rollover available per the one rollover limitation. The Roth conversion will be reported on Form 8606 as usual, and the funds to convert can come from the trust (revocable I assume) and flagged as a conversion contribution to the Roth IRA.
Permalink Submitted by Mary K. Dean on Wed, 2020-05-06 16:13
Thanks Alan. The manager of the brokerage firm where we have accounts says he has not heard of this. Can you give the IRS notice or code to support the rollover to the Roth? Is the ability to place a rollover into a Roth new? It is a major discount broker but they are usually behind and difficult to work with on changes in the law.
Permalink Submitted by Alan - IRA critic on Wed, 2020-05-06 17:06
A Roth conversion has always been done in one of 3 ways listed in Pub 590 A, p 44. These include a 60 day rollover, a trustee to trustee transfer, or a same trustee transfer. For a 60 day rollover, the one rollover limit does not apply as also stated on p 44. An RMD cannot be converted, but the CARES Act waives all RMDs for 2020, therefore this distribution is not treated as an RMD. Finally, the 60 day rollover deadline that normally applies to any indirect (60 day) rollover was extended by IRS Notice 2020-23 to 7/15 for distributions made on 2/1 or later. Or perhaps the fact that the distribution was deposited into a trust is their concern. As long as the trust is revocable (RLT), the client is free to move funds into and out of the trust. Client may have a checking account, savings account, or brokerage account titled to the trust on which they can write checks for any reason. Most of these trusts use a SSN as their TIN. One other issue to note is that when a distribution from a TIRA is converted using a 60 day rollover, the same property that was distributed, usually cash, must be the asset converted to the Roth. Therefore, if the client happened to have distributed stock shares out of the TIRA and transferred them to the trust, those same shares would have to be transferred from the trust to the Roth IRA. Client cannot substitute cash for securities or vice versa when doing an IRA rollover.
Permalink Submitted by David Mertz on Wed, 2020-05-06 17:47
Supposedly there are some financial institutions that refuse to accept indirect, 60-day Roth conversion contributions. If that’s the situation here, since a portion of the distribution is being rolled back to the traditional IRA anyway, just roll the entire distribution back to a traditional IRA and do the Roth conversion from there. However, if none of the distribution was being rolled back to a traditional IRA, find a financial institution that will accept the indirect Roth conversion contribution to avoid unnecessarily using the one allowed rollover per 12 months.