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Ed Slott was named "The Best" source for IRA advice by The Wall Street Journal and called "America's IRA Expert" by Mutual Funds Magazine. He is a widely recognized professional speaker and educator specializing in retirement distribution planning, teaching both financial advisors and consumers how to best take advantage of our complicated tax code.
-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com
This week, he tackles a variety of questions from investors and accountants on beneficiary IRAs, hardship withdrawals and reconverting traditional IRAs back into Roth IRAs.
Question 1:
Hello. I participate in a company 401(K) and have accumulated a large sum over the years. I would like to convert this money into either a Roth IRA or a Roth 401(K) neither of which is offered by my company for the employees. Is there any way (short of hardship or borrowing) to access this money that will allow me to do this?
Thank you.
Answer:
If your company does not offer a Roth 401(k) plan option you cannot use a Roth 401(k). Your 401(k) plan document or summary plan description will state under what conditions you can withdraw from the plan. If you are eligible to take a withdrawal (watch out for adverse consequences), you can convert to a Roth IRA.
A hardship withdrawal will not be eligible for conversion to a Roth IRA or for rollover to an IRA. You will, of course, pay income tax on the pre-tax dollars at the time of conversion. It is always preferable to pay any income tax due on the conversion with outside money rather than using the IRA funds.
Question 2:
I have a new client, 60 years old, whose husband, age 62, died four months ago. Her previous advisor had her husband’s IRA converted to a beneficiary IRA for my client. I understand why you might do this if the deceased was over 59-1/2 and the surviving spouse was younger than that, but not in this case. Is there a reason to do this that I am missing?
Is it possible to convert what is now a beneficiary IRA to an IRA in the name of my client so that she does not have to take mandatory distributions until age 70-1/2?
Answer:
You can change the account inherited from a spouse to the surviving spouse’s own account, called a spousal rollover, at any time, This will allow the spouse to wait until attainment of age 70 1/2 to take RMDs. Be sure the spouse names her own beneficiaries on the account, both a primary and a contingent.
Question 3:
Hi Mr. Slott. My name is Elie Tabet. I have a question regarding a transaction I would like to perform in 2012. I would like to contribute money to a 2012 non-deductible traditional IRA in January 2012. I read online that after a few days, I can convert that balance into a ROTH IRA.
Normally, I contribute the max to a Roth IRA in January.
The following year, after determining my AGI, I find out that I contributed too much to the Roth IRA. As a result, I need to re-characterize the excess into a non-deductible traditional IRA. I then have to convert that amount back to a Roth IRA. This is becoming a hassle. I was told that I can do the above as a workaround since AGI limits for converting to a Roth were eliminated in 2010. I would like to confirm that please if possible.
Thank you for your help. Happy holidays and New Year.
Sincerely,
Elie Tabet
Answer:
If you cannot contribute to a Roth IRA in 2012 because your income is too high (if filing a joint return income exceeds $183,000 start to phase out at $173,000; if filing as single or head of household $110,000 - $125,000), you can contribute to a traditional IRA. You could then convert the traditional IRA to a Roth IRA at anytime. Keep in mind that if you have other traditional IRA funds you will have to use the pro-rata rule when converting.
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