Roth Conversion Horror Story: Bad Advice From an IRA Custodian
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If you wanted to have a 2012 Roth IRA conversion, the conversion funds had to leave your IRA account by December 31, 2012. They don’t have to be in the Roth IRA in 2012, they just need to be out of the IRA in 2012. You can take a distribution payable to yourself in November or December 2012 and within 60 days, sometime in January or February, roll over the funds to a Roth IRA. You can even take the funds from an IRA at financial institution A and roll them over to a Roth IRA at financial institution B.
This is what an individual, we will call her Pam, tried to do. She took funds out of her IRA in December 2012. In January 2013, she tried to open a Roth IRA account at a different institution and roll over her IRA funds. She told Company B that this will be a Roth conversion. Company B was hung up on what we call “like-to-like.” They told Pam that since her funds came from an IRA, they can open an IRA account for her, roll over her funds to the new IRA (like-to-like), and then she can do her Roth conversion. This way they can be sure that everything is done correctly – no mistakes. Wrong - BIG mistake.
Pam will now have a 2013 Roth conversion, not a 2012 Roth conversion. Is this a big deal? Maybe not, especially now that we know that 2013 income tax rates are going to be the same for most of us. But if Pam was better able to pay the income tax on a 2012 conversion, if she expects her income to already be higher in 2013, if she has a child looking for financial aid for college in 2013, or if she is starting to collect Social Security in 2013, she will be worse off by doing what Company B said they could do for her.
How do you recognize this type of bad advice? Pam was lucky. She was working with an Ed Slott trained advisor and he was able to recognize the problem and deal with it before it became a BIG mistake. You can find a listing of Ed Slott trained advisors on our web site, www.irahelp.com. Don’t go it alone in the complicated area of retirement planning. Mistakes can be very costly.
• Funds must leave an IRA or company plan in 2012 in order to have a 2012 Roth conversion
• The funds do not have to be in the Roth IRA in 2012 if you are doing a year-end 60-day rollover
• Consult with an expert in retirement planning before moving any retirement funds
• Don’t go it alone – mistakes can be very costly
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