Slott Report Mailbag: IRA Rollovers and Non-Resident Beneficiaries

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag shows that retirement planning involving IRAs can be complicated, and consumers just like you are confused about the rules and concerned they are making fatal, penalty-induced errors.  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.

Dear Mr. Slott,

I am and have been an avid follower of your programs on public television and have purchased your books as well as CD/DVDs. I respect your opinion very much and badly need your help. I have been disabled since 2008 due to an aortic dissection and will be turning 65 in December 2012. In early March 2012, I converted my company 401(k) to a traditional IRA and a Roth IRA.

I had 3 components in my 401(k):
1) A pre-tax contribution component
2) A post-tax component and
3) A Roth 401(k) component

I did a direct rollover as you have always said in your books. However, I received three checks from my employer, two in the name of the institution where I was rolling over and one directly in my name. One was for the Roth 401(k) to a Roth IRA, the second was a pre-tax 401(k) rollover to an Traditional IRA and a third check, which I did not know what to do with, upon advise of my CPA put it into a regular bank account. This latter amount I was told was from the post-tax 401(k) contributions that I had made during my work life. I have 3 questions:

1) I was wondering why I could not put this into a Roth IRA since this was my after-tax contribution to my 401(k)?

2) Further, can I convert a part of my IRA to a Roth IRA this year so that I can take advantage of the lower tax bracket I belong to at present (25%)?

3) Can I put this money in the same Roth IRA that I already have or do I need to open a new Roth IRA account?

I thank you in advance for your help and truly appreciate the work that you do particularly for people like me. Please help.

Sincerely,

Zerksis Boga

Answer:
The after-tax amount could have been rolled over (converted to a Roth IRA). Because more than 60 days has passed since you received those funds, they cannot be put into an IRA. You can certainly convert part of your IRA to a Roth IRA at any time. You do not need to open a new Roth IRA to do so.

2.

Your books about retirement planning are super helpful.

Questions:

1. All of my beneficiaries are non-residents of the USA. What are the tax implications of this? Do all beneficiary rules apply to them or are they totally different? Or do they have to pay much higher tax? If so, what is my way out?

I am single and I do not have any family in the USA. All of my relatives are overseas.

2. Can I move my IRA account to institutions overseas?

Thank you in advance for your assistance.

Chin Liao

Answer:
The taxation of a U.S. IRA to non-resident aliens is based on whether there is a tax treaty between the U.S. and that country. Also special income tax withholding rules apply. On the IRS website www.irs.gov, check Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and Publication 901, U.S. Tax Treaties, to learn about the tax treaties and withholding rules. A U.S. custodian must maintain IRAs.

Article Highlights

• You can convert part of your IRA to a Roth IRA at any time.
• The taxation of a U.S. IRA to non-resident aliens is based on whether there is a tax treaty between the U.S. and that country