Converting Inherited IRAs, IRA Rollovers Highlight Mailbag
By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
IRAs can be tricky, especially when you are a beneficiary trying to convert the funds to tax-free territory. We answer a question on that subject, as well as questions on IRA rollover rules and Roth IRA distributions in this week’s Slott Report Mailbag. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
1.
Dear Mr. Slott:
I have been paying attention to your advice for quite a few years now. My wife’s mother recently passed away, leaving a Roth IRA, an IRA, and other assets. We are setting up inherited IRAs to stretch over my wife’s lifetime. Is it possible to [partially] convert the inherited IRA to a Roth IRA? If such a conversion were possible, would the Roth amount have to be treated as an inherited Roth? Could the converted funds be added to the inherited Roth IRA?
Sincerely yours,
Scott G. Davis
Answer:
The tax code does not allow for converting inherited IRAs to inherited Roth IRAs. The reason is that a conversion is treated for tax purposes as a rollover and a non-spouse beneficiary can NEVER do a rollover. There is an exception for employer plans. The tax code allows a beneficiary to do a direct rollover of inherited plan balances and, since you can do a direct rollover, you can convert the inherited plan balance to an inherited Roth IRA. But, you have to pay the income tax due on the conversion and you have to start taking required distributions from the inherited Roth account in the year after death.
2.
I enjoyed reading and watching the video on IRA rollovers. I have a brokerage account with 50% of my IRA money in it. The other 50% is in CDs at various banks. Most have been invested for 5 years and are coming due this year.
What I still don’t understand is if I can only do one rollover each year from ALL of my CDs. Once they expire, can I go to my bank and rollover my CD to another bank and then go to another bank and rollover my CD to another bank and so on, as long as they are invested in at least a 1-year CD?
I asked a banker and he was not sure, basically he said that if I invested the money in a CD for 6 months, I could not roll it over to another 6-month CD because it was within the same year.
Thanks,
Anne K
Answer:
You can do one rollover from each IRA account every twelve months. A rollover is when you take a check payable to yourself from the IRA account. Once you have done the rollover, you cannot do another rollover out of either the distributing or the receiving IRA. In your example, you could go to bank #1 and roll the CD over to bank #2. Then you cannot do another rollover from either the bank #1 IRA account or the bank #2 IRA account for a year. Rollovers are not your only option for moving your CDs from one bank to another. You can have them transfer the money for you from one bank to another. You can do an unlimited number of transfers each year. But, most banks make it very hard for you to do a direct transfer. As an alternative, see if you can get them to make the check out to the new IRA CD. The suggested language from IRS is as follows: “ABC Bank as trustee of Individual Retirement Account of John Q. Smith.” This would avoid the one rollover per year rule and the need to get the funds into a new IRA within 60 days since it would be considered a transfer, not a rollover.
3.
Ed,
If you take a distribution from a Roth, is there a time limit if you want to put the money back into a Roth?
Sincerely,
Carol
Answer:
The rules for Roth distributions are the same as the IRA rules. If the Roth distribution is payable to you, you have 60 days from the date you receive the funds to put them into another Roth account. You can only do this once every 12 months for each Roth IRA.