Can I Make This Tax-Free IRA Rollover? | Ed Slott and Company, LLC

Can I Make This Tax-Free IRA Rollover?

By Sarah Brenner and Beverly DeVeny
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This week's Slott Report Mailbag answers a question about the IRA rollover procedure compared to trustee-to-trustee transfers and examines the Back-Door Roth IRA strategy. As always, we recommend that you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
 

1.

I want to rollover a traditional IRA to a similar traditional IRA. It will not be a trustee-to-trustee transfer (i.e. I will receive and deposit the funds).  I took my RMD (required minimum distribution) earlier this year. I have not taken any other distributions or done any rollovers in the past 12 months. Am I allowed to do the tax-free rollover this year?

I look forward to your response

G W (Mac) McGarity    

Answer:
Rollovers between IRAs are subject to many rules. For your IRA distribution to be eligible for rollover you must be sure that you have not done any other IRA-to-IRA or Roth IRA-to-Roth IRA rollover within the past 12 months. You cannot roll over your required minimum distribution (RMD), and the first distribution you take from an IRA in a year when you must take an RMD is considered to be your RMD from that IRA. Also, you must roll over the IRA distribution by the 60th calendar day after you receive the distribution. Transfers between IRAs are not subject to any of these rules. While it sounds likely that you may roll over a distribution from your IRA, you will want to discuss your situation with a knowledgeable financial advisor to be sure. You also may want to reconsider doing a trustee-to-trustee transfer, you will have far fewer rules to worry about breaking!


2.

I read in the FAQs that any IRA can be converted to a Roth IRA. Does this mean that if someone who does not qualify because of income limits to contribute directly to a Roth IRA can instead contribute to a non-deductible IRA and immediately convert that IRA to a Roth IRA? Since that makes no sense from a tax perspective I'm doubting that it's possible, but hoping that it is!

Thanks!

Cheryl Gardner

Answer:
Yes! Many advisors will suggest a strategy where a client makes a tax-year contribution to an IRA and then soon after converts the funds to a Roth IRA. This is sometimes referred to as “the Back Door Roth IRA” strategy. The strategy is somewhat controversial and has some limitations. For example, you mention making a nondeductible IRA contribution and then converting those funds to a Roth IRA. It is important to remember that if you have other IRA funds that are pretax, a pro-rata formula applies when determining the taxation of your conversion. You may not choose to convert only the nondeductible (after-tax funds). We have written extensively on the “Back Door Roth IRA” strategy - you can download our special report here.

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