Rollovers to both IRA and RothIRA

[Guest BobH]

I have an IRA from which I get a distribution every month. I intend to take my minimun required distribtion with the first two months payments (I am over 71), then rollover the next two months payments into another IRA (within 60 days). I will not be able to do another IRA rollover for one year.

QUESTION

Can I immediately do a rollover of subsequent payments to a Roth IRA?. Since the Roth IRA rollovers do not have a one year waiting period, can I continue to make rollovers to roth IRAs every month or two during the year?

BobH

[John G]

You are confusing some terms and some facts.

You can do multiple IRA moves in a year if they are done by a direct transfer from custodian to custodian, where you don't ever touch a check. The one year limit applies when you have them issue you a check and you personally move the funds. I highly recommend the direct transfer approach as you never have to worry about the 60 day period, and these direct transfers can be done quickly. Just fill out the forms at the receiving custodian and attach a monthly statement of the prior custodian account.

When you move IRA money to a Roth, it is called a conversion. Most often this is from IRA to Roth where both are at the same custodian. You can do this in one step, two steps, or more. You write a letter of instructions, and complete a 1 or 2 page application. Then just watch for the transaction to be completed. There is no connection between an IRA transfer between custodians and a Roth conversion. Two different games. Think football vs basketball... well maybe that is stretching the point. You may want to be kind to your custodian and not try to do a lot of transactions. I am not sure why you would want to do a monthly conversion - that seems to be asking for trouble and increasing the chance for a screw-up.

I hope you understand that there will probably be taxes owed on the amount converted. You may want to talk with your accountant or tax advisor about the value of converting. One positive is that the Roth assets have no mandated or schedule withdrawal program.

[Guest BobH]

John G.

Thank you for your response. I can not make a direct transfer, because the contract with the IRA trustee specifies monthly payments to me for a number of years. I understand transfers from IRA to IRA, which I intend to do, but that will be limited to once a year and only two monthy payments can be rolled over within 60 days. A rollover of the remaining months payments to a Roth IRA would be very desireable for me.

My question is: does the rollover to the IRA in any way limit my subsequent rollovers to the Roth IRA.

I think these rollovers also have to done within 60 days; therefore I would require several rollovers to cover several months of payments.

BobH

[John G]

The "rules" you state are not made by the IRS. The IRS does limit you to one rollover a year if you are taking a check, and it all has to be done in 60 days.. But a direct C to C transfer avoids many of these issues.

It is not clear how much you are being told is just you current custodian's rules. Maybe you are either (1) missing some of the subtle differences between direct C to C transfers vs. taking the funds out by check, or (2)talking with some folks that don't understand the IRS rules. Did you sign a specific agreement for distributions or are you refering to the defaults your custodian uses?

If you have someone specific in mind for a new custodian, you might want to take your statements and any contracts/papers to them and ask for their opinion about the rules they would impose. It is not clear to me that your current custodian can lock you into their program.

I am pretty sure that the solution to your problem is to completely leave your current custodian, having carefully choosen the new one who will give you the flexibility you want. I would recommend that you use the custodian to custodian approach to preserve future options and avoid any timing issues.

Keep the terminology staight. A rollover in your case would refer to any IRA to IRA transaction. A conversion would refer to any IRA to Roth transfer.

[Guest BobH]

Thank you again. Howerver, I am required to take a monthly check from my IRA. The contract was carefully reviewed by my lawyer, because of the situation I am in, which is not an unusual situation. I have in the past rolled over from IRA to IRA, both direct and after receiving a check. I am not familiar with Roth conversions. Are there any IRS rules that prohibit me from converting a IRA payout to me to a Roth IRA at another institution, after I have already rolled over a check to an IRA? Is there any IRS rule limiting the number of times per year I can make a conversion.

BobH

[John G]

Call to our resident accountants. Please, take a crack at this question. Am I missing something?

I am not sure that any IRA custodian can rope you to a chair and keep you from moving your funds for the rest of your life. That just does not sound right. Are you talking about an IRA with an insurance company or annuity? Or some real estate trust or other "exotic"? I am not convinced you can be restricted if your assets are at a bank, mutual fund or brokerage.

If you are not working, you can NOT make contributions to a Roth. You must have earned income.

However, you can convert an IRA to a Roth. There are max income limits and tax filing status issues in any year that determine if you are eligible. Normally, folks can make multiple conversions in a tax year if they want. A conversion has absolutely nothing to do with an IRA transfer. Conversions are something completely different. If you are not familiar with conversions, then you can't possibly know if they are beneficial for you. Conversion mathematics and the tax issues are complex. If you are considering this for a significant amount of money, you need to talk to your tax advisor or accountant.

I suspect that there are more to your circumstances than you have disclosed and trying to provide advice long distance based upon what most people are doing is frustrating. I highly suggest that you get an appointment at Charles Schwab, Fidelity, or any of the major mutual fund or brokerage houses and discuss your specifics. Ask for someone who is knowledgeable about retirement planning.

[jevd]

It sounds like this is an Annuity Contract that has been annuitized and therefore the payment stream cannot be transferred custodian to custodian unless the entire contract is moved to a new custodian. It may be a problem to convert individual payments to a ROTH administratively as the individual must do it payment by payment after the RMD has been satisfied but I don't know why it couldn't be done. Any other isight form the group?

[Guest BobH]

Thank you for your answer--- I can make multple Roth conversions, without regard to any IRA rollovers.

My IRA situation is too complicated to explain, and has nothing to do with typical IRA situations.

The reason it is advantageous to convert the cash payout to a Roth is that it is taxable whether I convert or not, and in a Roth the earnings on the investment will not be taxable.

BobH

[John G]

Whoa..... hold them horses

Your logic on Roth conversions is not complete. If you are paying taxes at the same rate both now and in the future, a conversion could be a wash. The amount paid in taxes now would normally grow over time to match the tax obligation in the future. Conversion math is not simple, and you must make a number of assumptions about future tax rates and investment returns. If you are talking about a large amount of money, you really should spend a few dollars and talk to a professional familiar with Roth conversions. Not all conversions are advantageous. Partial or staged conversions may be attactive because you avoid tax bracket creep. Conversions are best done in low tax years or when it seems likely that your future tax rate will be much higher. One small example of something you might overlook. You would not want to convert in NJ if you planned to move to Texas or Florida in a year because those states have no income tax on conversions.

More on multiple conversions: You can certainly have 12 partial "conversions" a year as opposed to the one a year restriction on IRA transfers. But, the mechanics in your circumstance may be tricky. Perhaps you can get the receiving custodian to accept the monthly dispursements as a series of conversions. It does not hurt to ask. One issue to address is how to avoid paying taxes twice since custodian 1 will report an IRA dispursement (triggering ordinary income tax obligation) and custodian 2 will report a Roth conversion (triggering a second tax obligation on the same money, yikes!).

I am troubled by your comments that your circumstances are very unussual. You really should talk to a professional who can be aware of all the details of your situation. Something you have not disclosed here could make a huge difference on what you are allowed to do and if your plan makes sense. Its OK not to disclose details here - but do see a professional before you take any action.

If you look at some of the history on this message board you will see that many of the problems folks ran into were related to not getting professional advice prior to a major transaction. I remember on example here in Colorado where a couple did a transaction involving $250,000 and didn't want to spend $400 for advice. Their subsequent legal, accounting, and IRS bills ran into five figures and they came very close to losing their tax shelter status for their retirement account.

Note, I am not in the conversion advice business. I am not a CPA or tax advisor. When I did a Roth conversion in 1998, I knew more about the process than my accountant... but I still hired him to replicate my conversion math and advise me. It was $300 well spent.