Questions about Roth Conversions: What NOT to do

[Ladychips]

I've been reading on Roth conversions quite a bit but there seem to be SO MANY variables that I'm having difficulty understanding my options.  And when in doubt, I turn to the forum.

I need to know...specifically...what NOT to do in preparing or ciphering for a Roth conversion.  Let's assume the following facts (not all of which are true...but would be true in the circumstances I'm asking about:

1. I am retired
2. I am a widow
3. I am four years away from 59.5 age
4. I have several pockets of money: a) a 403b still with my former employer (and that I am withdrawing from since separation).  I may or may not want to roll part of that into an IRA; b) an inherited 457 from my spouse's former employer (that I probably rolled into his existing IRA); c) an inherited IRA from my spouse; d) my own IRA from a former employer's pension plan that is with Fidelity and I would like to move it to Vanguard.
5. To the best of my knowledge, ALL of these funds listed above were contributed pre-tax

So my question is, what are the things I canNOT do if I want to convert to Roth over the next 17 years.  For example, I know that if I inherit my husband's IRA and start taking withdrawals, rather than making it my own, I cannot convert that money to a Roth.  I know there are problems if there is post-tax money in the IRA, but I don't have any of that as far as I know.  How would I know that in the case of the inherited IRA?

I just want to make sure I don't make any decisions now that affect my ability to convert in the future...

I appreciate any assistance you can share.

Edited to fix age math and the difference between pre and post tax

[MDM]

1. I am retired
3. I am five years away from 59.5 age
4. I have several pockets of money: a) a 403b still with my former employer (and that I am withdrawing from since separation).

Apparently you are not yet 55 years old, and thus the Rule of 55 is not applicable.  If this is correct, how are you withdrawing the money?

So my question is, what are the things I canNOT do if I want to convert to Roth over the next 17 years.  For example, I know that if I inherit my husband's IRA and start taking withdrawals, rather than making it my own, I cannot convert that money to a Roth.

Other than the inheritance issues you mention, there is no restriction on traditional->Roth conversions.

5. To the best of my knowledge, ALL of these funds listed above were contributed pre-tax
I know there are problems if there is pre-tax money in the IRA, but I don't have any of that as far as I know.

A typo in here?

[secondcor521]

This may be helpful:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions

So you can do a Roth conversion if you have a traditional IRA with money in it.

You can get money into your traditional IRA in a number of ways, which the above link alludes to.

For example, I know that if I inherit my husband's IRA and start taking withdrawals, rather than making it my own, I cannot convert that money to a Roth.

I don't think the above statement is true, unless the withdrawals you're referring to are RMDs or part of an SEPP.

If it's just a regular withdrawal, the IRS explicitly says you can roll such a withdrawal into your traditional IRA, and from there you could then do a Roth conversion:

"However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution isn't a required distribution, even if you aren't the sole beneficiary of your deceased spouse's IRA."

-- https://www.irs.gov/publications/p590b#en_US_2019_publink1000230539

I also don't see any time limitation on you rolling all or part of your deceased spouse's IRA into your IRA, so you could always do that.

I know there are problems if there is pre-tax money in the IRA, but I don't have any of that as far as I know.  How would I know that in the case of the inherited IRA?

You can in fact do Roth conversions if you have nondeductible contributions in your traditional IRA; there are just additional calculations that can be done on Form 8606 to lower the taxes due on the conversion.

If you inherited an IRA and it had nondeductible contributions or basis, the executor hopefully knows that information and passes it along to you.  If not, then you'll just pay somewhat more in taxes because you'll have to assume all of the conversion is taxable instead of some portion of the conversion.  The real way to know is to look at the original owner's tax records related to the IRA - I think it would be a combination of Form 5498s and their tax returns, especially their Form 8606s if they ever filed one.

[terran]

If you're over 55 in the year you leave your employer you withdraw penalty free from that, if you leave your husband's 457(b) in the plan when you inherit it you can withdraw penalty free from that regardless of age, and if you inherit his IRA as an inherited IRA you can withdraw from that penalty free. You can roll over any of those three sources (or part of any of those sources) in excess of the amount you think you'll need to use before you're 59.5 to a traditional IRA (or inherit the IRA as a spousal inherited IRA, which makes it just like your own IRA), but by doing so you lose the early withdrawal benefits, so I would leave enough plus some cushion for your spending between retirement and age 59.5.

Anything in a traditional IRA other than the inherited IRA if you don't inherit as a spouse can be rolled over to a Roth IRA. If you have any Roth IRA open for at least 5 years then any conversions can be withdrawn without penalty 5 years after the conversion or after age 59.5 (whichever comes first) without penalty.

If you decide you want to roll over part of the 403(b) or 457(b) at any time you can do that by only rolling over part of them directly to a traditional or Roth IRA (if allowed) or taking a withdrawal and making an indirect rollover by making a rollover contribution to your traditional or Roth IRA. You can only make one indirect rollover per 12-month period (not per calendar year) or the rollover will be disallowed and considered an excess contribution (has to be removed) and will be considered a withdrawal from the account you took in out of. So either only do direct rollovers or just make sure indirect rollovers (withdrawal followed by contribution) are limited to one every 12-months.

[Ladychips]

@MDM, I am not 55 in real life, but I am in this story.  I fixed my bad math.  And yes, I made a mistake in #5...I meant post-tax.  Thanks for pointing those out so I could fix and make my scenario correct.

But for the main part, there are NO restrictions in converting an IRA, regardless of source, amount, or anything else to a Roth?  I wasn't really gun-shy until I read that I can't convert an inherited IRA to a Roth.  I had made a fairly significant plan around doing just that...and then found out I couldn't.  I've also read a number of stories where people thought they could convert and then couldn't.  But i've never understood the nuts and bolts of those stories...hence, my question.

@secondcor521  and @terran, you both posted in my previous question about financial planner or tax guy (which prompted this post).  I thank you both so much for contributing to this conversation.  @terran, I don't know how to find out (at this specific time), if I can leave the 457b in his plan or not.  It's definitely a thought for later.

Here is another thing I'd like to know.  Does anyone have a source, preferably an IRS source, that says you can do one thing with part of an inherited ira/457/403b/whatever and something else with the rest of it?  That would really solve some issues for me...

[MDM]

I wasn't really gun-shy until I read that I can't convert an inherited IRA to a Roth.

Where did you read that?  In general, that is not correct for a spouse, but there may be more to your situation....

[slappy]

I wasn't really gun-shy until I read that I can't convert an inherited IRA to a Roth.

Where did you read that?  In general, that is not correct for a spouse, but there may be more to your situation....

A spouse likely wouldn't have an inherited IRA though. They would generally move the money into their own IRA. So the statement does make sense.

[Ladychips]

I wasn't really gun-shy until I read that I can't convert an inherited IRA to a Roth.

Where did you read that?  In general, that is not correct for a spouse, but there may be more to your situation....

i wasn't clear, and I'm not sure I'll be any more clear with this post but here's a shot at it.  As the spouse, I have multiple options of 'claiming' money from my deceased spouse.  One is to make it my own...roll it into my own and it is as if it is was always mine.  But with that comes the limitation that I cannot withdraw it without penalty until I am 59.5.  OR, I can inherit and NOT make it my own.  As long as my spouse was eligible to withdraw (59.5+), I can withdraw penalty free.  That sounds perfect to me.  But my plan was to withdraw what I needed for 5 years until I turned 59.5 and convert the rest.  But I read I cannot convert it unless it is my own.  Is that wrong?

[terran]

Regarding the 457(b), HR might now, but then your husband would have to share health information and/or that he was planning to leave to not make it sound like a strange question. He might be able to get the answer from the custodian/vendor, which wouldn't involve sharing information with his coworkers. I've fairly sure you'll be able to leave it where it is a 457(b), but in your name, but I can't give you a 100% definite answer on that. Make sure he's set you up as the beneficiary on his retirement account(s).

You might be able to get some answers from a document called a "summary plan description" for the plan that his employer is supposed to provide on request. It's kind of a plain english explanation of the plan's features. The one from my wife's employer is set up like an FAQ with questions and answers.

[secondcor521]

@MDM, I am not 55 in real life, but I am in this story.  I fixed my bad math.  And yes, I made a mistake in #5...I meant post-tax.  Thanks for pointing those out so I could fix and make my scenario correct.

But for the main part, there are NO restrictions in converting an IRA, regardless of source, amount, or anything else to a Roth?

Here are the only restrictions I know of:

1.  The IRA is a traditional IRA.
2.  The IRA is yours.
3.  The conversion is not part of an RMD or 72(t) (aka SEPP), or some other weird things that probably wouldn't apply to you.  Since you mentioned a timeframe of between now and 72, the RMD and SEPP restrictions probably won't apply to you either.

There is also the restriction on indirect rollovers as @terran mentioned.  My solution to that limitation is to not do them.  I just have my traditional IRA and Roth IRA at Vanguard, and I can do Roth conversions online via a web form.

Here is another thing I'd like to know.  Does anyone have a source, preferably an IRS source, that says you can do one thing with part of an inherited ira/457/403b/whatever and something else with the rest of it?  That would really solve some issues for me...

Well I certainly know that you can, but I'm just SGOTI.  @terran and @MDM may be able to cite chapter and verse for you.  The closest I can find is page 124 of IRS Pub 17 (https://www.irs.gov/pub/irs-pdf/p17.pdf) , where it talks about rollovers.  Unfortunately it seems mostly implicit instead of explicit.  The other source I have is that I and many others have done Roth conversions of only part of my IRA.

There may be *plan rules* on your 457 or 403(b) that restrict you from doing partial withdrawals - meaning, they might make you take a total distribution - but I doubt that.  You could find out by checking the plan document as @terran mentions above.  Even if that were the case, you could roll the 457 or 403(b) into your IRA, and then you can definitely do partial stuff from there.  (Although, as noted previously leaving the 457 where it is is probably a good idea if you want to use those funds to get you to 59.5.)

[secondcor521]

I wasn't really gun-shy until I read that I can't convert an inherited IRA to a Roth.

Where did you read that?  In general, that is not correct for a spouse, but there may be more to your situation....

i wasn't clear, and I'm not sure I'll be any more clear with this post but here's a shot at it.  As the spouse, I have multiple options of 'claiming' money from my deceased spouse.  One is to make it my own...roll it into my own and it is as if it is was always mine.  But with that comes the limitation that I cannot withdraw it without penalty until I am 59.5.  OR, I can inherit and NOT make it my own.  As long as my spouse was eligible to withdraw (59.5+), I can withdraw penalty free.  That sounds perfect to me.  But my plan was to withdraw what I needed for 5 years until I turned 59.5 and convert the rest.  But I read I cannot convert it unless it is my own.  Is that wrong?

Yes, that is wrong.

Read (or reread) the second quote in my previous response, where I quoted the IRS rule that says that you can take a distribution from your deceased spouse's traditional IRA as beneficiary (the "inherit and NOT make it [your] own" option to use your terms) and then roll that over into your traditional IRA.  From there, you can convert that money to your Roth.

What I do not know, but the others might, is whether that kind of rollover can be done as a direct rollover.  I would guess it could.  You could ask the customer service of whomever you expect to be the custodian of your husband's IRA and they should be able to tell you.

[MDM]

Well I certainly know that you can, but I'm just SGOTI.  @terran and @MDM may be able to cite chapter and verse for you.  The closest I can find is page 124 of IRS Pub 17 (https://www.irs.gov/pub/irs-pdf/p17.pdf) , where it talks about rollovers.  Unfortunately it seems mostly implicit instead of explicit.  The other source I have is that I and many others have done Roth conversions of only part of my IRA.

https://www.irs.gov/pub/irs-wd/201909003.pdf may be helpful.  In there, it's noted "that amounts from an “inherited” IRA cannot be rolled over into another IRA."  This means no Roth conversions for "inherited" IRAs.

But here's the twist: by the law's definition, 26 U.S. Code § 408(d)(3)(C)(ii)(II), it's not an "inherited" IRA if acquired by the surviving spouse.  This means no problem (other than paying the tax) for Roth conversions of accounts that one inherits from a spouse because, by the law, that is not an "inherited" IRA. 

[secondcor521]

Well I certainly know that you can, but I'm just SGOTI.  @terran and @MDM may be able to cite chapter and verse for you.  The closest I can find is page 124 of IRS Pub 17 (https://www.irs.gov/pub/irs-pdf/p17.pdf) , where it talks about rollovers.  Unfortunately it seems mostly implicit instead of explicit.  The other source I have is that I and many others have done Roth conversions of only part of my IRA.

https://www.irs.gov/pub/irs-wd/201909003.pdf may be helpful.  In there, it's noted "that amounts from an “inherited” IRA cannot be rolled over into another IRA."  This means no Roth conversions for "inherited" IRAs.

But here's the twist: by the law's definition, 26 U.S. Code § 408(d)(3)(C)(ii)(II), it's not an "inherited" IRA if acquired by the surviving spouse.  This means no problem (other than paying the tax) for Roth conversions of accounts that one inherits from a spouse because, by the law, that is not an "inherited" IRA.

@MDM, note that the OP is considering not assuming the inherited IRA and simply remaining the beneficiary in order to preserve her ability to withdraw from his IRA without penalty.  Does that twist affect any of what you wrote above?

[MDM]

Well I certainly know that you can, but I'm just SGOTI.  @terran and @MDM may be able to cite chapter and verse for you.  The closest I can find is page 124 of IRS Pub 17 (https://www.irs.gov/pub/irs-pdf/p17.pdf) , where it talks about rollovers.  Unfortunately it seems mostly implicit instead of explicit.  The other source I have is that I and many others have done Roth conversions of only part of my IRA.

https://www.irs.gov/pub/irs-wd/201909003.pdf may be helpful.  In there, it's noted "that amounts from an “inherited” IRA cannot be rolled over into another IRA."  This means no Roth conversions for "inherited" IRAs.

But here's the twist: by the law's definition, 26 U.S. Code § 408(d)(3)(C)(ii)(II), it's not an "inherited" IRA if acquired by the surviving spouse.  This means no problem (other than paying the tax) for Roth conversions of accounts that one inherits from a spouse because, by the law, that is not an "inherited" IRA.

@MDM, note that the OP is considering not assuming the inherited IRA and simply remaining the beneficiary in order to preserve her ability to withdraw from his IRA without penalty.  Does that twist affect any of what you wrote above?

On p. 22 of https://www.irs.gov/pub/irs-pdf/p590b.pdf one finds "...if you receive a distribution before you are age 591/2, you may not have to pay the 10% additional tax if you...are the beneficiary of a deceased IRA owner."  That confirms the "preserve her ability to withdraw from his IRA without penalty" portion.

The "it's not 'inherited' (in the strict sense of the US Code) even though it is inherited" twist allows rollovers, including Roth conversions.

What Every Spouse Needs To Know About Inheriting IRAs and RMD Rules For Inherited IRAs - Fidelity are a couple of non-IRS articles that say the above in non-IRS language.

It appears that Ladychips' plan "to withdraw what I needed for 5 years until I turned 59.5 and convert the rest" will be fine with the IRS.

[Ladychips]

It appears that Ladychips' plan "to withdraw what I needed for 5 years until I turned 59.5 and convert the rest" will be fine with the IRS.

Well all righty then.  That is some excellent information.  And I deeply appreciate the resources.  You all are wonderful!