Ed Slott was named "The Best" source for IRA advice by The Wall Street Journal and called "America's IRA Expert" by Mutual Funds Magazine. He is a widely recognized professional speaker and educator specializing in retirement distribution planning, teaching both financial advisors and consumers how to best take advantage of our complicated tax code.
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This week, he tackles a variety of questions from investors and accountants on beneficiary IRAs, hardship withdrawals and reconverting traditional IRAs back into Roth IRAs.
Question 1:
Hello. I participate in a company 401(K) and have accumulated a large sum over the years. I would like to convert this money into either a Roth IRA or a Roth 401(K) neither of which is offered by my company for the employees. Is there any way (short of hardship or borrowing) to access this money that will allow me to do this?
Thank you.
Answer:
If your company does not offer a Roth 401(k) plan option you cannot use a Roth 401(k). Your 401(k) plan document or summary plan description will state under what conditions you can withdraw from the plan. If you are eligible to take a withdrawal (watch out for adverse consequences), you can convert to a Roth IRA.
A hardship withdrawal will not be eligible for conversion to a Roth IRA or for rollover to an IRA. You will, of course, pay income tax on the pre-tax dollars at the time of conversion. It is always preferable to pay any income tax due on the conversion with outside money rather than using the IRA funds.
Question 2:
I have a new client, 60 years old, whose husband, age 62, died four months ago. Her previous advisor had her husband’s IRA converted to a beneficiary IRA for my client. I understand why you might do this if the deceased was over 59-1/2 and the surviving spouse was younger than that, but not in this case. Is there a reason to do this that I am missing?
Is it possible to convert what is now a beneficiary IRA to an IRA in the name of my client so that she does not have to take mandatory distributions until age 70-1/2?
Answer:
You can change the account inherited from a spouse to the surviving spouse’s own account, called a spousal rollover, at any time, This will allow the spouse to wait until attainment of age 70 1/2 to take RMDs. Be sure the spouse names her own beneficiaries on the account, both a primary and a contingent.
Question 3:
Hi Mr. Slott. My name is Elie Tabet. I have a question regarding a transaction I would like to perform in 2012. I would like to contribute money to a 2012 non-deductible traditional IRA in January 2012. I read online that after a few days, I can convert that balance into a ROTH IRA.
Normally, I contribute the max to a Roth IRA in January.
The following year, after determining my AGI, I find out that I contributed too much to the Roth IRA. As a result, I need to re-characterize the excess into a non-deductible traditional IRA. I then have to convert that amount back to a Roth IRA. This is becoming a hassle. I was told that I can do the above as a workaround since AGI limits for converting to a Roth were eliminated in 2010. I would like to confirm that please if possible.
Thank you for your help. Happy holidays and New Year.
Sincerely,
Elie Tabet
Answer:
If you cannot contribute to a Roth IRA in 2012 because your income is too high (if filing a joint return income exceeds $183,000 start to phase out at $173,000; if filing as single or head of household $110,000 - $125,000), you can contribute to a traditional IRA. You could then convert the traditional IRA to a Roth IRA at anytime. Keep in mind that if you have other traditional IRA funds you will have to use the pro-rata rule when converting.
You have until Oct. 15 of the year following the conversion to recharacterize. After that date you cannot recharacterize those funds.
The rule states that once you convert and then recharacterize, you cannot reconvert those same funds until the year after the year of the conversion or more than 30 days after the recharacterization – whichever is later.
Question 4:
Greetings! My associate and I had a question on traditional IRA and Roth IRA conversions. Our question is this:
If a client converts their traditional IRA into a Roth IRA in 2011, then re-characterizes the Roth IRA back into a traditional IRA also in 2011, is there a waiting period to once again convert the Traditional IRA back into a ROTH once again in 2011?
Any guidance on this issue would be greatly appreciated. Thank you very much!
Answer:
There is a waiting period before you can reconvert. You must wait at least 30 days or until the year after the conversion, whichever is later. In this case, the conversion was in 2011 and the recharacterization was in 2011.
Normally you would have to wait until Jan 1, 2012 to reconvert. But, since this is December, 2011, if the recharacterization was done in December you would have to wait until at least 30 days to reconvert since that would be later than Jan 1, 2012.
-- Have something you want to ask Ed? Send your questions to
