IRA rollover 1-year waiting period affects Roth conversions?

[tioga]

Publication 590 states that a rollover from one IRA to another is subject to a waiting period. Specifically, on page 23, it states: "Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover."

My question is whether the above rule applies to Roth conversions. I have a traditional IRA called IRA-1. In December 2012, I converted this IRA to a Roth IRA called Roth-1. In January 2013, I contributed into IRA-1 with the goal of converting it also to Roth-1.

Does the 1-year waiting period rule disallow the above transaction? Should I have made the January 2013 contribution to a different traditional IRA called IRA-2?

[Epsilon Delta]

Publication 590 states that a rollover from one IRA to another is subject to a waiting period. Specifically, on page 23, it states: "Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover."

My question is whether the above rule applies to Roth conversions. I have a traditional IRA called IRA-1. In December 2012, I converted this IRA to a Roth IRA called Roth-1. In January 2013, I contributed into IRA-1 with the goal of converting it also to Roth-1.

Does the 1-year waiting period rule disallow the above transaction? Should I have made the January 2013 contribution to a different traditional IRA called IRA-2?

The waiting period does not apply to Trustee to Trustee transfers. Usually Roth conversions are done as Trustee to Trustee transfers, so unless the custodian of IRA-1 sent the funds directly to you and you sent them to the custodian of Roth-1 you have nothing to worry about on this score.

See page 18 where it makes clear that "Rollovers" and "Trustee to Trustee transfers" are two different things.

Can You Move Retirement Plan Assets?

You can transfer, tax free, assets (money or property) from
other retirement programs (including traditional IRAs) to a
traditional IRA. You can make the following kinds of trans-
fers.
• Transfers from one trustee to another.
• Rollovers.
• Transfers incident to a divorce.
This chapter discusses all three kinds of transfers.

[Default User BR]

How is a Roth conversion tax-free?


Brian

[Don Christy]

How is a Roth conversion tax-free?


Brian

It's often tax free when doing the "back door" Roth conversion. For example, you make non-deductible TIRA contribution and immediately convert to Roth. Assuming no other taxable contributions or earnings, the conversion is tax-free.

[kaneohe]

I think this question is still open..........whether a conversion that is not trustee to trustee can follow a rollover within a year.
It is clear that another rollover cannot be done but a conversion? If the receiving institution required receipt into a TIRA before conversion, that might be forbidden? but could they accept it directly into a Roth? and would the latter be ok?

edit to add: the chart on p. 17 here http://www.irs.gov/pub/irs-pdf/p590.pdf
suggests that the term rollover is used to include a variety of things including Roth conversion when the trustee is changed and the movement is not done trustee-to-trustee. My guess then is that you can't do a TIRA to Roth conversion that is not trustee-to-trustee within a yr of a previous rollover.

[Default User BR]

How is a Roth conversion tax-free?

It's often tax free when doing the "back door" Roth conversion. For example, you make non-deductible TIRA contribution and immediately convert to Roth. Assuming no other taxable contributions or earnings, the conversion is tax-free.

No, you pay taxes on the portion of the conversion that is taxable. That portion might be zero. That's not the same as a tax-free rollover, where nothing will be taxed regardless of it's previous taxation.


Brian

[Don Christy]

How is a Roth conversion tax-free?

It's often tax free when doing the "back door" Roth conversion. For example, you make non-deductible TIRA contribution and immediately convert to Roth. Assuming no other taxable contributions or earnings, the conversion is tax-free.

No, you pay taxes on the portion of the conversion that is taxable. That portion might be zero. That's not the same as a tax-free rollover, where nothing will be taxed regardless of it's previous taxation.


Brian

I assumed you were asking your question in good faith, and that you didn't know how a Roth conversion could be tax-free, as in no taxes due. I see now that your question was rhetorical.

[Default User BR]

My guess then is that you can't do a TIRA to Roth conversion that is not trustee-to-trustee within a yr of a previous rollover.

From Pub 17 (emphasis mine):

Conversions
You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described earlier under Rollover From One IRA Into Another under Traditional IRAs, apply to these rollovers. However, the 1-year waiting period does not apply.

http://www.irs.gov/publications/p17/ch17.html#en_US_2011_publink1000172846


Brian

[Default User BR]

I assumed you were asking your question in good faith, and that you didn't know how a Roth conversion could be tax-free, as in no taxes due. I see now that your question was rhetorical.

Well, it wasn't in bad faith. There's a difference between "How is a conversion tax-free" and "How can a conversion be tax-free". The comment was intended to point out that a conversion is not a tax-free event, even if you don't end up paying taxes. You still have to calculate and enter the taxable amount of the conversion, even if that's a 0. Regardless, the IRS pubs specifically state that the one-year period doesn't apply in this case, which I have noted elsewhere.


Brian

[tioga]

My guess then is that you can't do a TIRA to Roth conversion that is not trustee-to-trustee within a yr of a previous rollover.

From Pub 17 (emphasis mine):

Conversions
You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described earlier under Rollover From One IRA Into Another under Traditional IRAs, apply to these rollovers. However, the 1-year waiting period does not apply.

http://www.irs.gov/publications/p17/ch17.html#en_US_2011_publink1000172846


Brian

Good one Brian. I went back and looked at Publication 590 and see the same language there. In the 2011 Pub 590, it is on page 18 and again on page 60. Thank you.

Does anyone know why this post isn't getting formatted like the other ones? [Edit - figured it out - I had disabled "BBCode". Thank you bUU]

[bUU]

Edit the post and see if the "Disable BBCode" checkbox is checked, under "Options", just under the action buttons.

[Alan S.]

As documented by Brian, conversions are exempt from the one rollover per 12 months limit. In fact, because they are exempt they create a neat "work around" if you take a non conversion distribution and before the 60 days is up notice that you did a prior rollover from the same IRA in the last 12 months and cannot roll it back. This rule is mostly enforced at the custodian level, and there are a few rare custodians out there that would refuse to accept your roll back to the same account because they were aware of this rule. In that case, the work around is to convert the distribution to a Roth IRA and then recharacterize it back to the TIRA since neither conversions nor recharacterizations count with respect to the one rollover rule. Your distribution is safely back in the TIRA instead of being taxable and subject to penalty.