Q.: I have inherited a $45,000 IRA from my uncle. I would like to convert this inheritance to a Roth IRA. My CPA told me this is permitted, while my insurance agent says it cannot be rolled over to a Roth IRA. I value your opinion. S.P.
A.: The inheritance must be rolled into an IRA. It may not be converted to a Roth IRA, even though you are willing to pay the tax. If, however, the inheritance came from an employer-retirement plan like a 457(b), 401(k) or 403(b), you would be allowed to roll over the $45,000 to an IRA and defer the tax or convert the $45,000 to a Roth IRA and pay the tax. This is one case where the taxpayer is willing to pay the tax but the IRS says no thank you. Yes, this is peculiar but it's the tax law. Apparently, the lawmakers wanted to be more flexible when the source of the inheritance was an employer-plan account.
Q.: I am a TRS retiree with deferred status in the TDA-403(b) Plan. I did not invest in the Roth feature of the Deferred Compensation 457(b)/401(k) Plans of the City of New York. Would you recommend that I use my first Required Minimum Distribution from the TRS-TDA Plan to open a traditional IRA and a Roth IRA with the Vanguard Group? G.R.
A.: You have not paid tax on your TDA contributions nor on the profits those contributions generated during the decades you contributed. At age 72, assuming you are retired, tax law requires you to begin making required withdrawals every year for the remainder of your life. These annual taxable amounts are referred to as Required Minimum Distributions (RMDs) and may not be re-invested in a tax-qualified plan like a traditional or Roth IRA. I ask you: If this was allowed, when would you start to pay the taxes (Federal and state) on your untaxed TDA balance?
That being said, after you take your annual taxable RMD, you are permitted to convert (roll over) all or a portion of your remaining pre-tax TDA balance to an IRA or a Roth IRA. Please contact me for the steps to be followed.
Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at email@example.com.
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