Rollover Contribution to ROTH

[Guest FET]

I have just completed this month a direct rollover of my 401-K plan with a previous employer to a Rollover IRA. I would now like to convert either all or a portion of the Rollover IRA to a ROTH IRA before the 1999 year-end. My AGI (not counting the amount that would be converted to a ROTH) is less than $100,000 in 1999, and I am single; but I have no taxable compensation in 1999. I know that I would have to pay taxes on the amount that I would convert to a ROTH IRA. I would like to know the following:

1. Am I allowed to make a rollover contribution from my recently-established Rollover IRA to a ROTH IRA in 1999 even though I have no taxable compensation in 1999?

2. If the answer to #1 is yes, what is the dollar limit of the amount I can convert to a ROTH IRA in 1999?

3. If the answer to #1 is yes, am I allowed to make a partial conversion from the Rollover IRA to a ROTH IRA and keep the rest in the Rollover IRA? (It seems that Publication 590 implies that I could, but I cannot find anything in Section 408A of Title 26 that would allow a partial conversion.)

4. If I were to convert all or a portion of the Rollover IRA to a ROTH IRA in 1999 and then later find out that such a conversion (rollover contribution) is not allowed, would I be allowed to recharacterize the ROTH IRA back to a traditional IRA in the year 2000 before the due date (including extensions) of my income tax return for 1999 and suffer no adverse repercussions (i.e. taxes, penalties, etc.)?

5. Section 408A©(7) and Section 219(f)(3) of Title 26 say that a contribution to a ROTH IRA for a particular year must be made no later than the due date (not including extensions) for filing the return for such year....but I have heard people say that a rollover contribution for 1999 must be made before the end of 1999. Which is correct?

A key point to consider in answering the above questions is whether a "rollover contribution" (i.e. "conversion") is considered to be a "contribution". The very term "rollover contribution" implies that it IS a "contribution".

Section 408A©(2) (including its reference to Section 219) of Title 26, the Internal Revenue Code, basically states that the Contribution Limit is the lesser of $2000 or one's taxable compensation for the year (assuming one does not contribute to non-ROTH IRAs). It does NOT distinguish between a regular yearly contribution and a rollover contribution. That would seem to imply that the above-mentioned limit does indeed apply to a rollover contribution. Separately, Section 408A©(3) deals with limits based on modified AGI. Section 408A©(3) DOES make a distinction between a regular yearly contribution and a rollover contribution...but again, Section 408A©(2) on Contribution Limits DOES NOT.

[BPickerCPA]

1. Yes

2. No limit, you can convert up to the entire balance in your traditional IRA accounts

3. Partial conversions are allowed

4. Yes

5. Contributions can be made up to 4/15 of the following year. Conversions must be done by 12/31 of the current year.

[John G]

ALERT: If you plan to get this conversion done in 1999, you better hustle. Many custodians establish a cutoff date in December after which they will not do a conversion. Don't wait one second. Call your custodian immediately and find out if you can still get it done. Draft a letter of request tonight and get it submitted ASAP. Then, follow up the request to make sure it gets done. Just because you ask, doesn't mean it gets done. If it is not completed my Dec 31, you have to start over and qualify for the year 2000. You always get one shot to undo, but you only have 7 days to get it done this year.

Good luck.

[BPickerCPA]

A couple of points to add to John G's message.

One is that if the custodian cannot get the conversion done, and the account is fairly liquid, you can get a check from the custodian in '99, and you have 60 days to then put it into the Roth. It will count as a '99 conversion as long as the money is OUT of the traditional IRA in '99. However BE CAREFUL that the money then goes directly into a Roth. Last year, Schwab erroneously told customers that the money had to go back into a traditional IRA and then be converted. That would blow the whole deal.

The second point is that if you are unsure whether or not to do the conversion, GO AHEAD AND DO IT. You then have until 10/15/2000 to change your mind. In effect, if you do the conversion now you have until 10/15/2000 to decide if you want it. If you don't do the conversion, you ability to make the decision ends on 12/31/99.

[Guest actuary31]

My married daughter has changed jobs and received $46,ooo from her employer 401k and profit sharing plans. $40,ooo was rolled directly to an IRA and the $6000 was sent to her directly as a "tax paid rollover"-- ie from the time that all employee contributions were not tax deductible. My advisor at Schwab says she cannot put the $6000 in a rollover Roth-- even though her AGI is well within the AGI limits. Is the best she can do to establish a new Roth and put $2000 for 1999 and then $2000 for 2000 next month? Her income is about $20,000 and her husbands about the same. Could she use the remaining $2000 to establish a Roth for him even though his employer puts about $1500 a year in an IRA for him?

[This message has been edited by actuary31 (edited 12-24-1999).]

[BPickerCPA]

The most that can go into all IRAs, total, for a year is $2K. If $1,500 is already deposited, then only another $500 can go into a Roth.

[John G]

BPicker, I think you may have left things a little confused. Here is my shot.

The $2000 limit applies to each person for each year, assuming that earned income threshold has been met. You can contribute anytime during the tax year and even in the following year as long as it is before you file your tax return. In your case, your daughter can wait until January (avoid the year end rush and Y2Kers!) and fund a Roth IRA for both 1999 and 2000 by contributing $4000. Make sure that you correctly designate tax year, and check you next monthly statement to make sure it got done correctly. Her husband is constrained by the prior contributions, the combined max is $2000.

Early contributions are desireable because you extend the period of the tax shelter. Your daughter is to be congratulated for showing discipline and not spending it now.

[This message has been edited by John G (edited 12-24-1999).]

[Guest FET]

BPickerCPA and John G,

Many thanks for your advice. I would have replied sooner but was busy following your advice. The custodian did indeed have a cutoff date before year-end. Moreover, it converted the wrong amount, and I had to get it to correct the amount before year-end.

[BPickerCPA]

[[Many thanks for your advice. I would have replied sooner but was busy following your advice. The custodian did indeed have a cutoff date before year-end. Moreover, it converted the wrong amount, and I had to get it to correct the amount before year-end.]]

You gotta love those custodians!