IRA Conversion to Roth and subsequent rollover | Ed Slott and Company, LLC

IRA Conversion to Roth and subsequent rollover

Taxpayer converts $ 150k of Traditional IRA to a Roth. Within 60 days the taxpayer takes out the $ 150k from the Roth and puts the proceeds into a new IRA. Would this rollover qualify as tax-free? It is understood that there will be tax and penalties computed on the Roth earnings.

The "new IRA" must be a Roth IRA. If so, then there is no taxable event since a rollover was completed within 60 days. A taxpayer can only do one such rollover within a 12 month period, but a conversion does not count as a rollover for purposes of this rule. Therefore, this 60 day rollover is allowable, but taxpayer cannot roll over another distribution for 12 months after the date the 150k was distributed from the Roth IRA.

Thanks for the follow up. Where can I find a reference that says the new IRA has to be a Roth? 

  • IRS Reg 1.408A-6 Q 1(c) is copied below. Note - the distribution must be rolled only to another Roth.
  • (c) An amount distributed from a Roth IRA will not be included in gross income to the extent it is rolled over to another Roth IRA on a tax-free basis under the rules of sections 408(d)(3) and 408A(e).
  • IRS rollover chart is copied below. A Roth IRA distribution cannot be rolled to a TIRA:
  • https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
  • Therefore, a Roth distribution is taxable under the Roth IRA ordering rules if the Roth is not qualified. Earnings would be taxed and possibly subject to penalty if under 59.5 and also a 10% penalty on any Roth conversions under 5 years, which includes the recent 150k conversion. The contribution to a TIRA is limited to the allowable amount for a regular TIRA contribution and the additional amount is an excess TIRA contribution which must be removed with allocated earnings to avoid the 6% excise tax.
  • Such a rollover would obviously be a major mistake. Perhaps it could be salvaged under Rev Proc 2016-47.
 

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