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By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

When converting an IRA to a Roth IRA, do the investments (stocks, bonds, ETFs, etc.) have to be sold or can they be transferred directly from the IRA into the new Roth account?

Answer:

There is no requirement that investments be sold before a Roth conversion. If the same custodian will be holding the converted funds, the custodian will simply retitle the existing traditional IRA account as a Roth IRA with the same investment portfolio. If it is a partial conversion, the custodian will transfer the appropriate number of shares from the traditional IRA to the Roth IRA. If a new custodian is used, the conversion can usually be done via a direct transfer (also known as a trustee-to-trustee transfer). However, if you hold certain unconventional investments, it’s possible the new custodian won’t accept them.

 

Question:

Hello,

Can someone, age 70, do a rollover of a 20-year old Roth 401(k) with a former employer to a new Roth IRA without having to start the 5-year clock all over again?

Thanks for any help you can provide.

Mike
Answer:

Dear Mike,

This is a complicated issue. The 5-year clock on the new Roth IRA does have to start over again, but only for determining whether earnings credited after the rollover can come out tax-free. The period that the funds were held in the 401(k) does not carry over to that 5-year clock, so it starts fresh on January 1 of the year the new Roth IRA is established. That’s why it’s important to fund a Roth IRA (even with a small contribution) as early as possible in order to get the Roth IRA clock started. The good news is that the rolled-over funds themselves (both Roth 401(k) contributions and earnings credited before the rollover) can be distributed tax-free at any time after the rollover. That’s because the Roth 401(k) owner in this case was at least 59 ½ at the time of the 401(k) distribution and held the Roth 401(k) for at least 5 years. All of the former Roth 401(k) dollars go into the Roth IRA as essentially one big contribution, and Roth IRA contributions are always immediately available tax- and penalty-free.

https://www.irahelp.com/slottreport/roth-ira-conversions-and-roth-401k-roth-ira-rollovers-today%E2%80%99s-slott-report-mailbag