With advisors and investors focused on tax season, Ed Slott returns with some quick answers on Roth IRAs, required minimum distributions, and what all this means before (and after) April 18.

Is Roth IRA's an All or Nothing Proposition?

Dear Ed:

A 62 year old client had an $80,000 traditional IRA which he converted $64.000 to a Roth and  kept out $16,000 for personal use. He will pay the tax on the $16,000 but wishes to split the income recognition of the $64,000 over 2011 and 2012. Can he do that, or by taking some out is he now precluded from deferring the balance over 2011 and 2012. Our software seems to only allow the entire distribution to be deferred or none at all.   

Darryl G. Eddy of Jarrard, Seibert, Pollard & Co.

Darryl,

The “two-year deal” for 2010 conversions is only all or nothing for your client’s Roth IRA conversion income. From your question, it appears that your client took a $16,000 distribution from his traditional IRA and then converted the balance of $64,000 to a Roth IRA. If that’s the case, then the $16,000 regular distribution will be included in your client’s 2010 income. The remaining $64,000 of conversion income will be split evenly ($32,000 per year) over 2011 and 2012 unless your client actively elects to include it all in 2010.

If however, your client first converted the full $80,000 to a Roth IRA and then took a distribution of $16,000 for personal use from the Roth IRA, the tax effect would be slightly different. The $80,000 of conversion income would be evenly split over 2011 and 2012, but (assuming this is your client’s only Roth IRA) the $16,000 distribution he took in 2010 would be accelerated from 2012 as taxable income for 2010. As a result (assuming no further Roth distributions until at least 2012), your client would have $16,000 of income in 2010, $40,000 of income in 2011 and $24,000 of income in 2012.

Can RMD's Be Rolled Over to a Roth?

Dear Ed:

I and my wife are 72 years old. We have started in 2010 RMD Retired Minimum Deductions. We are retired. Can I roll these IRA’s over to Roth? I have no earnable income.

Sincerely,

Susan Cracchiolo

Susan,

Unfortunately, regardless of whether or not you have earned income, the answer is No. Required minimum distributions are ineligible to be rolled (converted) to a Roth IRA. You can, however, use your RMDs to help pay the tax on a conversion of all or part of your remaining IRA balance after the distribution is taken. Any amounts converted to a Roth IRA would not be subject to RMDs during your lifetime.

Two Questions on Roth IRAs

Dear Ed: 

I have 2 questions regarding Roth IRAs: Tthe general description is that all earnings distributions are tax free (assuming age, holding period etc. requirements have been met). I want to confirm that that also applies to what would be capital gains earnings?

Also, I was told that Roth IRA losses in basis could be deducted on tax return, Schedule D.

Are these correct?

Thank you, Ed. I look forward to your books and PBS appearances.

Elizabeth Dean

Elizabeth,

If you have met the rules for a qualified distribution (5 years and either 59 ½, death, disability or first-time homebuyer up to $10,000), then all future distributions from your Roth IRA will be tax free. This is true regardless of whether the Roth gains have come from interest, dividends, capital gains or any other source. There are no capital gains within an IRA since income earned inside an IRA is not recognized.

If the total value in all your Roth IRAs is less than your basis in all Roth IRAs, then you may be able to deduct the loss. It’s no easy feat though. First, you have to empty (distribute) all your Roth IRAs. The difference between your basis and the distributed amounts becomes an itemized deduction reported on Schedule A (1040) of a return (not Schedule D), so if you generally take a standard deduction you may lose out on all or a portion of the deduction’s benefit. The total of all your miscellaneous itemized deductions, including the IRA loss, must exceed 2% of your AGI. And on top of all that, the deduction can be lost if your subject to AMT.  Plus, you no longer have any Roth IRA. So yes, it’s possible to deduct a loss from a Roth IRA, but for most people, the benefits are rarely worth it.

Named “The Best” source for IRA advice by The Wall Street Journal and called “America’s IRA Expert” by Mutual Funds Magazine, Slott is a widely recognized professional speaker who has trained hundreds of thousands of financial advisors across America. He has collaborated to create the nationally aired Public Television specials, “Lower Your Taxes! Now & Forever with Ed Slott” (2010), “Stay Rich for Life! with Ed Slott” (2009), and “Stay Rich Forever & Ever with Ed Slott” (2008). Slott has also established the IRA Leadership Program and Ed Slott’s Elite IRA Advisor GroupSM, which were developed specifically to help financial advisors and institutions become recognized leaders in the IRA marketplace. Slott is the author of Ed Slott’s Retirement Decisions Guide: 2011 Edition
(Ed Slott, 2011),
Ed Slott’s Retirement Decisions Guide: 2010 Edition (Ed Slott, 2009), Stay Rich for Life! Growing & Protecting Your Money in Turbulent Times (Ballantine Books, 2009), Parlay Your IRA Into a Family Fortune (Penguin, 2008), Your Complete Retirement Planning Road Map
(Ballantine Books, 2007),
The Retirement Savings Time Bomb...And How to Defuse It (Penguin, 2007) and Ed Slott’s IRA Advisor, a monthly IRA newsletter. He also writes personal finance columns for numerous financial publications and co-authored an extensive special report with Harry Dent titled,
Taxing Away Your Wealth.

Slott is a past Chairman of the New York State Society of CPAs Estate Planning Committee and editor of the IRA Planning section of The CPA Journal. He is a past recipient of the prestigious “Excellence in Estate Planning” and “Outstanding Service” awards presented by The Foundation for Accounting Education. He is a former Board member of The Estate Planning Council of New York City.