Should I ALWAYS Convert Funds to a NEW Roth IRA?

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

This week’s Slott Report Mailbag looks at how many times you should convert funds from the same Roth IRA and if a fee to close an IRA account is considered a distribution for tax purposes. As always, we recommend 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’m moving my traditional IRA to another company and will be charged $100 to close the account. Will that $100 be considered a distribution for tax purposes? Can I send a check for $100 to the new company so the full amount is transferred?

Thank you.

Answer:
Assuming the $100 fee is deducted from your IRA’s balance, it will not be considered a taxable distribution to you. Also, you cannot reimburse your IRA for the fee that was deducted from your balance.

2.

If after a Roth conversion, one wants to make more than one conversion in subsequent years, can they use the same Roth account or does a new one have to be opened? And if conversions have to be separated, can you subsequently combine them? Thanks.

Answer:
For tax purposes, conversions don’t have to be kept separate because the Tax Code treats all of your Roth IRAs as one Roth IRA. However, for purposes of recharacterizing (reversing) a conversion, it may be beneficial to convert different investments to separate NEW Roth IRAs (that contain no other Roth funds) and leave them in the separate NEW Roth IRAs until the October 15 deadline to recharacterize expires. That way, Roth IRAs that decrease in value can be recharacterized while those conversions that have increased in value can be kept. After the October 15th deadline, your Roth accounts can be combined.