DIRECT ROTH CONVERSIONS AND QCDs: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
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I am 66 years old and live on Social Security and other retirement income. Additionally, I have about a half million dollars in pre-tax 457(b) funds that I do not need for current expenses. Are these funds in the pre-tax retirement accounts eligible for Roth conversion? Can I withdraw funds from the 457(b) account and deposit them in a Roth IRA? Must I have current compensation to do a Roth conversion?
Assuming you are eligible to take a distribution from your 457(b), those funds can be directly converted to a Roth IRA. You do not need to have current compensation to do a Roth conversion. Of course, you will need to pay taxes on the amount that you convert.
Can a QCD be made from a SEP or SIMPLE IRA if the employer/participant does NOT make a deductible contribution to the SEP or SIMPLE IRA during the tax year in which the QCD is made? Alternatively, can a traditional IRA account be established as a receptacle for a trustee-to-trustee transfer of funds from the SEP or SIMPLE IRA followed by a QCD from the "new" traditional IRA account? Would the IRS successfully argue step transaction to prevent this planning strategy?
Yes, you can do a QCD from a SEP IRA for a particular year, but only if you do not receive a contribution from the SEP for that year. (This would be considered an “inactive SEP.”) Even if you receive a SEP contribution, you could roll over or transfer SEP funds to a traditional IRA and then do a QCD from that IRA. This is a perfectly acceptable workaround and not considered a step transaction.
The same rule applies to SIMPLE IRAs. However, you can only do a rollover or transfer from a SIMPLE to an IRA if you have participated in the SIMPLE for at least two years.
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