Advanced Underwriting Consultants

Question of the Day – December 16

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Here’s the question of the day.

Question: I have a client who wants to do a Roth conversion with his traditional IRA.  The client will start the conversion in the current calendar year, but will finish it (by 60 day rollover) in the next one.  In which year will the income tax result occur?

Answer: The tax result for a Roth conversion will occur in the year the distribution from the traditional IRA takes place.

Say Fred takes distribution from his traditional IRA on December 15, 2011.  He rolls over the money—converting it—to a Roth IRA on February 1, 2012.  The income tax result associated with the conversion is a calendar year 2011 event—even though Fred could have theoretically rolled over the distribution to another traditional IRA and avoided taxation in 2012.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – December 8

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client took a distribution from her IRA 55 days ago, and intended to re-deposit the money under the 60 day rollover rule.  She’s having trouble coming up with the cash for the deposit.  May she take another distribution from her IRA and use it for the rollover deposit—effectively extending the rollover deadline for another 60 days?

Answer: No, not if the money for the second distribution is coming from the same IRA as the first distribution.  The plan for the subsequent 60 day rollover would violate the one rollover per year rule.

Here’s a quote from IRS Publication 590, which describes how the rule works:

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.

Under the facts above, the taxpayer is planning to take two distributions from the same IRA within a 12 month period.  Only one of those distributions may be rolled over under the rule quoted.

However, the answer would potentially be different if the taxpayer has three separate IRAs.  To illustrate the point, let’s call these IRA-1, IRA-2 and IRA-3.

Say the taxpayer took a distribution of $50,000 from IRA-1 55 days ago.  The taxpayer does not have the cash on hand to roll over the distribution within the 60 day deadline, so the taxpayer takes another $50,000 distribution from IRA-2 now.  The taxpayer deposits the $50,000 into IRA-3 and treats the deposit as a rollover of the $50,000 taken from IRA-1.

If the taxpayer is able to find enough cash within a short time after that rollover, the taxpayer can complete the $50,000 rollover of the distribution from IRA-2 into IRA-3.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.