Slott Report Mailbag: Can I Perform More Than One Taxable Roth Conversion Per Year?

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag comes LIVE from The Cosmopolitan in Las Vegas as we get ready for Ed Slott’s 2-Day IRA Workshop this Saturday and Sunday.  We answered questions on Roth conversions, the Roth IRA 5-year rules, and where an IRA goes at your death. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Is it possible to perform more than one taxable Roth conversion during one 12-month period? Thanks you.

Amy Brocious

Answer:
Yes it is. The one-rollover-per-year rule does not apply to conversions to Roth IRAs.

2.

I began my 401(k) Roth deferrals in 2005 and contributed 3,000. In 2010, I put 5,000 in a Roth IRA. I rolled the 401(k) Roth funds into Roth IRA in 2011 (due to loss of job). Then later in 2011, I rolled the entire Roth IRA to another company (where current plan is).

Does the 5-year clock start over in 2010, 2011? Or does each Roth type (IRA and 401(k)) have 2 different 5-year clocks? Thank you.

Answer:
The rules are a bit complicated, but basically the rollover from your Roth 401(k) to your Roth IRA in 2011 was six years from when you contributed in 2005. So if you were age 59 ½ or older when you did the rollover, then the rollover is considered a qualified distribution. For a qualified distribution of a Roth 401(k) to a Roth IRA, the entire amount of the distribution will be treated as a regular contribution (basis) and is available for distribution tax free. The 5-year Roth IRA holding period would not apply to these funds.

If you were not age 59 ½ or older when you did the rollover from the employer plan, then the rollover is considered a non-qualified distribution. When a non-qualified distribution is rolled over to a Roth IRA, the portion of the distribution that constitutes a non-taxable return of investment in the contract (your Roth 401(k) deferrals) is treated as contributions (basis) in the Roth IRA for the purpose of the ordering rules. The 5-year holding period for the distributions of earnings on those funds will be the period applicable to the Roth IRA which started in 2010.

3.

I have a substantial IRA that goes into a trust when I die and whereby my spouse will continue to draw the income from the IRA upon my death and upon her death the IRA goes to my grandchildren. However, I have been told that if I die, the IRA must be liquidated and that the only way it would not be liquidated is if my wife is the sole beneficiary. My question is two fold. Is this correct? Or is there another way that my wife could benefit from the income generated by the IRA without the government taking a big chunk?

Thanks
Pat B

Answer:
No it’s not correct. Remember that your IRA does NOT “go into” a trust at your death. The trust becomes the beneficiary of the IRA and only has to take RMDs (required minimum distributions) from the inherited IRA each year. There is no rule that says that if your wife is not the sole beneficiary, the IRA must be liquidated. If the trust is a look-through trust, then death distributions will be made using your wife’s single life expectancy. If the trust is not a look-through trust, then death distributions will be paid over five years if you die before your required beginning date (RBD, generally April 1 of the year after attaining age 70 ½), or paid over your remaining single life expectancy if you die after your RBD.