Roth IRA 60-Day Rollover Rules

Many times we get the question “Do the 60-day rollover rules apply to Roth IRAs?” The answer is, yes.

When a distribution from a Roth IRA is made payable to the Roth account owner, the owner has 60 days from the date he receives the funds to roll the funds over to another Roth IRA. This type of rollover can only be done once every 12 months. No other rollovers can be done out of either the distributing Roth IRA or the
receiving Roth IRA. Funds can still be rolled into those accounts though.

But, funds are not locked in those accounts for a year. Even though you cannot do another rollover you can still do a direct transfer of any of the funds in either Roth account to another Roth IRA. A Roth recharacterization can also be done from either account because it must be done as a direct transfer.

A rollover from a Roth 401(k) (or similar employer Roth plan) does not count. If the check from the employer is made payable to the plan participant, the 60-day rollover period does still apply but there is no once-per-12-month limit.

Funds that are not eligible for rollover, but are nevertheless rolled over, become excess contributions in the receiving account. Excess contributions are subject to a penalty of 6% per year for every year they remain in the account. The penalty is reported on Form 5329, which is filed with the account owner’s federal income tax return. If the form is not filed, the statute of limitations does not start to run on the penalty.

All of the above limits and potential problems can be eliminated by doing direct transfers. Instead of having a check made out to the individual, it should be made out to the receiving institution for benefit of the individual’s Roth IRA account. Then there is no 60 days to worry about, no once-per-year rule, and no worries about excess contributions.

IRS can allow extra time to complete a rollover in limited situations. The catch - the fees you have to pay. The extension can only be granted by requesting a private letter ruling. The IRS fees range from $500 to $3,000 depending on the amount of the rollover. In addition, you have to pay someone to prepare the ruling request. There is no guarantee that IRS will grant any request. If the request is denied, there are no refunds.

- By Beverly DeVeny and Jared Trexler

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You CAN'T Change Your Mind on a Roth 401(k) Conversion

While many of us know that you can convert an IRA to a Roth IRA, a process that’s not as well understood is a Roth 401(k) conversion. If you participate in a 401(k) at work, you can convert your existing plan assets to a Roth account inside the 401(k) plan. This option is known as an “in-plan conversion.” But check with your employer first because although the law allows an in-plan conversion, your plan may not have this option.

The in-plan conversion rules also apply to 403(b) plans, governmental section 457(b) plans, and the thrift savings plan of the federal government. The Roth account inside your 401(k) plan is called a designated Roth account in the tax code. The in-plan Roth conversion will be taxable to you, but the funds inside the Roth account will grow tax-free if certain rules are followed.

Previously, you had to be eligible to get a distribution from your 401(k) plan to do an in-plan conversion. However, that rule changed this year. Beginning in 2013, you’re now allowed to do an in-plan conversion even if you’re not yet eligible to take a distribution from your 401(k).

The major problem with an in-plan Roth conversion is that once you do it, there’s no turning back. By contrast, if you convert IRA money to a Roth IRA, the law allows you to change your mind, or reverse it. The IRS calls this a “recharacterization.”

Unfortunately, the rules don’t allow you to undo (“recharacterize”) an in-plan Roth conversion, so make sure it’s the right move before you do it. As we said earlier, because an in-plan conversion will be taxable to you, you’d better be sure you’ll have the money to pay the taxes you’ll owe. Also, if, after an in-plan conversion, the value of that Roth account drops due to poor investment performance, you’ll still owe taxes on the value of the assets converted as of the date of the in-plan conversion.

- By Joe Cicchinelli and Jared Trexler

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Slott Report Mailbag: How Does the New Tax Law Affect Me?

We have covered the new tax law (the American Taxpayer Relief Act of 2012) from both a retirement planning and tax planning standpoint since it was signed into law by President Barack Obama on January 2, 2013.  We wrote a quick analysis of the law complete with a 5-plus-minute video on 5 key planning points.  We followed with a detailed look at qualified charitable distributions (a topic we get frequent questions about), and how they were affected by the new law.

Since then, we have added the following: an in-depth site on 2013 IRA and tax tables, a piece on the many ways taxes have increased (even if your income taxes did not), and a look at the new in-plan Roth conversion provision and how it (and other factors) have made the Roth conversion decision more difficult.

Send questions to [email protected]

Yet, this 157-page law is complex, and The Slott Report will cover every inch and answer many questions on the new tax law throughout the year.  We have devoted this week's Slott Report Mailbag to some of the popular questions we have received about the new tax law. 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.

My wife and I make $500,000 between us and file a joint tax return. Will our income taxes be going up because of the new tax law?

Answer:
Yes. If your taxable income is over $450,000, you will face a new top tax bracket of 39.6%. In addition, you may see your exemptions and deductions reduced, you will have to pay a 0.9% surtax on gross wages in excess of $250,000, and you may also have to pay the 3.8% surtax on net investment income if applicable.

2.

Talking heads are saying the gift tax exemption became even more advantageous thanks to the new 2013 tax law. What makes it even better now than before?

Answer:
The lifetime gift tax exemption is now $5,250,000, up from $5,120,000 last year. In addition, portability, which is a rule allowing a surviving spouse to add any unused exemption amount from his/her spouse to his/her own exclusion amount, has been made permanent.

The annual gift tax exclusion amount for 2013 is $14,000, up from $13,000 last year. You can give up to $14,000 a year to as many people as you wish, totally free of any gift tax. The reason for the increase is to reflect inflation.

3.

I want to take advantage of the in-plan Roth conversion provision from the new tax law. I know one of the advantages of a Roth conversion is the ability to recharacterize by a specific date if I see the converted amount dropping in value. Does that also hold true for in-plan conversions?

Answer:
No. That is the biggest drawback to doing an in-plan Roth conversion. It is an irrevocable election. There are no do-overs.

4.

I've heard a lot about a new planning tool that was part of the new tax law. I have a 401(k) plan at my workplace. Can I convert part of that over to a Roth IRA?

Answer:
Maybe. If you are eligible to take a distribution from your plan, you can convert that amount directly to a Roth IRA. The new feature in the law was for 401(k) plans (or 403(b) or governmental 457(b) plans) that allowed a Roth feature, known as a Roth 401(k) (Roth 403(b) or Roth 457(b)), within the 401(k) plan. The law now allows all plan participants to convert their 401(k) assets to a Roth 401(k). Employer plans are not required to have a Roth feature and they are not required to allow these in-plan Roth conversions.

5.

An AMT patch was permanently passed as part of the new tax law. What is an AMT patch and who does it affect?

Answer:
The AMT is an alternative minimum tax system. It runs parallel to our "regular" tax calculations. If you have too much income and not enough tax, the AMT will kick in and you will have to pay more in income tax. It was originally instituted to try and make sure that the wealthy paid their fair share of taxes. However, it was never adjusted for inflation so each year more taxpayers were subject to the additional tax. As a result, Congress "patched" the AMT each year. The new tax law included the patch for 2012 and will index the AMT from that amount each year in the future.

- By Joe Cicchinelli, Beverly DeVeny and Jared Trexler

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The 5-Year Rules: Moving a Roth Employer Plan to a Roth IRA

You have a Roth 401(k), 403(b), 457(b) or federal government Roth TSP. You have left your job and want to move those funds to a Roth IRA. What 5-year rule applies to the rolled over funds?

Each Roth employer plan has its own 5-year clock unlike Roth IRAs, which have one clock that starts when you establish your first Roth IRA. This is the 5-year rule for “qualified” distributions, those distributions of earnings that are made after 5 years and age 59 ½ and thus are tax-free.

A Roth IRA can never be moved into a Roth employer plan but when you leave your employer your Roth employer plan can be rolled over to a Roth IRA. Once that rollover is done, what 5-year clock applies to the funds you have just rolled over?

The Roth IRA 5-year clock is the one that will apply. This can be good - it can be bad.

Example: John, age 62, has had his Roth 401(k) for 7 years. He has no Roth IRA. He rolls his Roth 401(k) to a Roth IRA. His 5-year clock for the funds will be the one applicable to his Roth IRA. Since this is his first Roth IRA, he will not be able to take a qualified distribution of earnings until 5 years have passed.

Robert, age 62, has had his governmental Roth 457(b) for 2 years. He has had a Roth IRA for 7 years. He rolls his Roth 457(b) account to a Roth IRA. His 5-year clock for the funds will be the one applicable to his Roth IRA. Since he has had a Roth IRA for 7 years and he is over age 59 ½, any distributions of the 457(b) funds will be a qualified distribution (tax-free).

- By Beverly DeVeny and Jared Trexler

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Contributions to Roth Employer Plan Accounts: What Can and Can't Be Contributed

We are frequently asked if Roth IRA accounts can be rolled into Roth employer plan accounts such as Roth 401(k)s, Roth 403(b)s or Roth 457(b) accounts. The answer is no. Here's why.

The tax code only allows the following funds to be contributed to Roth employer plan accounts:

• Salary deferrals from your wages
• Catch-up contributions if you are age 50 or over during the year
• Automatic enrollment deferrals
• Rollovers from other Roth employer plans
• In-plan conversions from funds held in the regular portion of your account

Other contributions, such as the employer match and forfeitures allocated to your account, must go into the regular portion of your employer plan. Rollovers, transfers, or conversions from IRAs or other employer plan funds are not allowed at all.

On the other hand, you can roll your Roth employer plan funds to your Roth IRA. You should consult with an advisor who has knowledge of the rollover rules and the five-year rules for this type of rollover. They are not the same as the rollover rules for a Roth IRA to Roth IRA rollover. You can find a listing of Ed Slott trained advisors on our website, www.irahelp.com.

- By Beverly DeVeny and Jared Trexler

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July 4th: Your Independence From Taxes

Ed Slott, America's IRA Expert, talks about halftime in 2012 and the upcoming July 4th holiday as a backdrop for moving more of your money from FOREVER taxed to NEVER taxed while tax rates are at historic lows. Ed provides some key 2012 retirement planning strategies, including Roth IRAs and Roth 401(k)s, in this IRAtv video.

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Video: Can I Move Money From a Roth IRA to a Roth 401(k)?

Ed Slott answers a question from a consumer in Florida about whether he can move money from his Roth IRA to a company-sponsored Roth 401(k). This video describes the differences between the two accounts and answers the question about transferring funds.



-Compiled by Ed Slott and Jared Trexler

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Roth IRA 5-Year Rules, Roth 401(k) Transfers Highlight Mailbag

Some of the trickiest IRA situations involving the Roth IRA 5-year rules. We receive questions about them constantly with each situation just a little bit different than the others. In this week's Slott Report Mailbag, we answer questions on the 5-year rules as well as an inquiry about Roth 401(k) transfer provisions.  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.



Send all questions to [email protected]

I have an individual 401(k) that has Roth provisions. Can I rollover some of the pre-tax portion to the Roth portion? My understanding was that contributions to either "side" were irrevocable. 



Thank you,

Roger Simard 




Answer:
If your company offers a Roth 401(k) plan, and the plan allows transfers (which have only been allowed by the tax code since 2010), you can transfer amounts that you are able to withdraw from the plan into the Roth 401(k). If you are transferring taxable amounts to the Roth 401(k) plan, you will have to include them in your income for the year of the transfer.


2.


I had a mixture of after-tax and pre-tax money in my 401(k). When I retired at age 57, I rolled the pre-tax money into a traditional IRA and the after-tax money into a Roth IRA. Can I take the after-tax money out of my Roth without receiving a penalty if it is within 5 years? This is money I contributed, not earnings.

Thanks,


Michael 



Answer:
You can always withdraw your basis without penalty, however there are ordering rules for Roth IRA distributions.

1. Contribution amounts are distributed first. These distributions are not taxable or subject to the early distribution penalty, even if made before five years or before age 59 1/2.


2. Converted amounts are distributed next, first in, first out. If the conversion had both pre- and after-tax amounts, the pre-tax amounts are distributed first. Converted amounts are not taxable. Pre-tax amounts are subject to the 10% early distribution penalty if the account owner is under age 59 1/2 at the time of the distribution and the conversion was less than five years ago.


3. Earnings are distributed last. They are not subject to tax if the distribution is made after the account owner has had any Roth IRA account for five years and is over the age of 59 1/2, or is dead, disabled, or is taking the funds for a first time home purchase. If the account owner is under the age of 59 1/2 at the time of the distribution, it is also subject to the 10% early distribution penalty.

For the ordering rules, all Roth IRAs are considered one. If the funds being withdrawn from the Roth IRA were originally after-tax funds, there is no penalty - the penalty is only assessed on amounts that were taxable at the time of the conversion.

3.

Hi Ed,

I understand that IRA is an acronym for Individual Retirement Agreement, not account. An IRA can contain numerous separate accounts. I established my Roth IRA back in 1998. I’m considering opening a second Roth IRA account and initially funding it with a partial direct tax-free rollover from the 1998 account.

After that, I intend to do additional funding with after-tax conversions from my 401(k). Once the new Roth IRA account is established, will the rules for withdrawals from that new account be the same as my originally established account back in 1998? That is, will both Roth accounts be considered to have met the five-year holding rule since they are part of the same Roth agreement? I’m older than 59.5 so no penalties for early withdrawal would apply to either account.

Thanks,

Jerry Zacke

Answer:
You are correct. IRA stands Individual Account Agreement. An IRA doesn't contain separate accounts. It could, however, contain separate investments. In your case, the five-year clock started in 1998. So you can open a new Roth IRA each year and not have to satisfy the five-year rule for any of those new accounts. There is a separate five-year rule for each conversion and the 10% early distribution penalty, however this will not apply to you because are over age 59 1/2.

- By Marvin Rotenberg and Jared Trexler

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