Rollover 401(k) to Roth IRA

[Guest Barney Byrd]

I'm well aware that the above is not allowed-and I did not learn the hard way. A 401(k) must be rolled over (or preferably direct transferred) to a traditional IRA. Funds in the traditional IRA can then be converted to a Roth if the plan owner wishes to do so.

As I said above, I didn't do this but I'm aware that a few others have. The 401(k) to Roth IRA transaction took place sometime in 1999. Now it is 2000 and the account holder belatedly discovers his error. I know the drill about getting the contributions, plus earnings, out of the Roth IRA by the due date, including extensions, for the 1999 tax return. The 60-day rollover period is blown so the funds can't be tax deferred by transferring them to a traditional IRA, or can they?

Is anybody aware of any special dispensations (like Catholics eating corn beef during lent when St. Patrick's day falls on a Friday) that a victim of this type of mistake could take advantage of?

[BPickerCPA]

In the case of a "conversion", a traditional IRA can now be designated as a roth IRA. I know of no custodian that has not required a new account set up with a new account number, but theoretically a converted roth could be the same account as the traditional IRA.

That being said, I suspect (and have no indication that this is the case, so consider this an OPINION) that the new, friendlier IRS will deem the transaction as a transfer to a traditional IRA followed by a conversion of that account to a roth.

IN other words, they won't blow up the IRA.

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Barry Picker, CPA/PFS, CFP

New York, NY

[Guest Barney Byrd]

Thanks, I appreciate the reply. If the IRA account to which the 401(k) funds were transferred was a Roth IRA from the start, I don't see how the designation option could be argued. I wonder if the taxpayer could recharacterize the rollover Roth IRA contribution as a rollover traditional IRA contribution. Do you think a letter ruling request is advisable?

[Guest Barrie]

Hello, I'm struggling to find a clear answer to a question about roth and regular IRAs. Can a retired person, who has no income other than from ss, IRA, open a Roth IRA? My mother is retired and is getting a settlement from a company suit. they established a 401k for the employees & retirees. I've wondered if she could have this, or part of her IRA, put into a Roth IRA. So far, I've never seen anyone address this. thank you.

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Barrie

[Guest Barney Byrd]

With respect to contributions, Roth IRAs mostly follow the same rules that apply to traditional IRAs. If you check the contribution rules for traditional IRAs, you will learn that one must have earned income to be eligible to contribute. Thus a retiree with income only from social security and IRAs would not be eligible to make regular contributions to a Roth IRA. Your mother could transfer her 401(k) to a traditional IRA, then convert some or all of the balance in the traditional IRA to a Roth IRA. In doing so, whatever amount she converts will be fully taxable to her in the year of conversion. For more information, go to the IRS web site at www.irs.gov and download Publication 590.

[John Olsen]

To contribute to a Roth IRA, one must have "earned income". Social Security, income from a retirement plan, deferred compensation, etc. do NOT count as such.

As was noted, this requirement does NOT affect a CONVERSION to a Roth from a traditional IRA (as a "conversion" is not a "contribution").

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

[John G]

I agree with all of the above about earned income limitation on IRA/Roths and the rollover option. There is another option your mother might find useful.....

She could write checks to fund the Roth IRA accounts of children and grandchildren if they have earned income. For example, she could give a working teenage grandchild the funds to start a Roth IRA. Same IRA/Roth rules apply, just the source of funds (all or part) is your mother. This would not benefit her directly but might be an element of a estate plan. On the down side, the funds leave her control. On the upside, you get multiple decades of tax shelter and you might pass on the "educational" value of teaching a new generation the potential of saving and investing. Note, the funds for the IRA do not have to come from the person with the earned income.

[Guest Barrie]

thanks for taking the time to answer my question and provide clarity.

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Barrie