WHY YOU MAY WANT BOTH A ROTH CONVERSION AND ROTH CONTRIBUTORY ACCOUNT

Both Roth Conversion and Roth Contributory Accounts can be used for contributions and rollovers, but there is one small advantage in keeping these items in separate Roth IRAs.  Here’s why:

  • Simplify the Complexity ― You could lessen the complexity of the situation if your conversion Roth IRA is separate from the one that has your regular contributions.
    But, the rules governing withdrawals are significantly different for the two accounts. How?
  • Withdrawal Restrictions ― You can withdraw contributions from your Contributory Roth IRA at any time. You must leave your money in a Roth Conversion IRA for at least five years or until you turn 59½, in order to avoid paying penalties.
  • Deadline for Conversion ― A conversion must be completed by December 31 to be included in that year’s taxable income. Managing the tax impact of a Roth IRA conversion requires careful analysis

When converting a traditional IRA, keep in mind:

  • If you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
  • RMD amounts are not eligible to convert to a Roth IRA.
  • Generally, converted assets in the Roth IRA must remain there for at least five years to avoid penalties and taxes.
  • A distribution from a Roth IRA is tax-free and penalty-free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death.
  • RMDs are not required during the lifetime of the original owner.

Some people like to keep both the Conversion and the Contributory Roth accounts for five years for easier tracking of the 5-year conversion holding requirement. You can also keep tabs on the converted amounts by creating a simple log showing the date and amount of each conversion, and whether that conversion remains in the Roth or has been distributed. This would allow the accounts to be consolidated to simplify record keeping.

Educated decisions lead to the best decisions.

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual’s personal circumstances.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

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