Examining Roth IRAs, retired minimum distributions and tax implications
With advisors and investors focused on tax season, Ed Slott returns with some quick answers on Roth IRAs, required minimum distributions and what all this means before (and after) April 18.
Roth IRAs: An all or nothing proposition?
A 62 year old client had an $80,000 traditional IRA, which he converted $64,000 to a Roth and kept out $16,000 for personal use. He will pay the tax on the $16,000, but wishes to split the income recognition of the $64,000 over 2011 and 2012. Can he do that, or by taking some out, is he now precluded from deferring the balance over 2011 and 2012? Our software seems to only allow the entire distribution to be deferred or none at all.
Darryl G. Eddy of Jarrard, Seibert, Pollard & Co.
The two-year deal for 2010 conversions is only all or nothing for your client’s Roth IRA conversion income. From your question, it appears that your client took a $16,000 distribution from his traditional IRA and then converted the balance of $64,000 to a Roth IRA. If that’s the case, then the $16,000 regular distribution will be included in your client’s 2010 income. The remaining $64,000 of conversion income will be split evenly ($32,000 per year) over 2011 and 2012 unless your client actively elects to include it all in 2010.
If however, your client first converted the full $80,000 to a Roth IRA and then took a distribution of $16,000 for personal use from the Roth IRA, the tax effect would be slightly different. The $80,000 of conversion income would be evenly split over 2011 and 2012, but (assuming this is your client’s only Roth IRA) the $16,000 distribution he took in 2010 would be accelerated from 2012 as taxable income for 2010. As a result (assuming no further Roth distributions until at least 2012), your client would have $16,000 of income in 2010, $40,000 of income in 2011 and $24,000 of income in 2012.
Can RMDs Be Rolled Over to a Roth?
My wife and I are 72 years old. We have started in 2010 Retired Minimum Distributions. We are retired. Can I roll these IRAs over to Roth? I have no earnable income.
Unfortunately, regardless of whether or not you have earned income, the answer is no. Required minimum distributions are ineligible to be rolled (converted) to a Roth IRA. You can, however, use your RMDs to help pay the tax on a conversion of all or part of your remaining IRA balance after the distribution is taken. Any amounts converted to a Roth IRA would not be subject to RMDs during your lifetime.
Two Questions on Roth IRAs
I have two questions regarding Roth IRAs: The general description is that all earnings distributions are tax free (assuming age, holding period, etc., requirements have been met). I want to confirm that that also applies to what would be capital gains earnings.
Also, I was told that Roth IRA losses in basis could be deducted on tax return, Schedule D. Are these correct?
Thank you, Ed. I look forward to your books and PBS appearances.
If you have met the rules for a qualified distribution (5 years and either 59 ½ years old, dead, disabled or first-time homebuyer up to $10,000), then all future distributions from your Roth IRA will be tax free. This is true regardless of whether the Roth gains have come from interest, dividends, capital gains or any other source. There are no capital gains within an IRA, since income earned inside an IRA is not recognized.
If the total value in all your Roth IRAs is less than your basis in all Roth IRAs, then you may be able to deduct the loss. It’s no easy feat, though. First, you have to empty (distribute) all your Roth IRAs. The difference between your basis and the distributed amounts becomes an itemized deduction reported on Schedule A (1040) of a return (not Schedule D), so if you generally take a standard deduction, you may lose out on all or a portion of the deduction’s benefit. The total of all your miscellaneous itemized deductions, including the IRA loss, must exceed 2% of your AGI. And on top of all that, the deduction can be lost if you’re subject to AMT. Plus, you no longer have any Roth IRA. So yes, it’s possible to deduct a loss from a Roth IRA, but for most people, the benefits are rarely worth it.
Ed Slott is a past chairman of the New York State Society of CPAs Estate Planning Committee and editor of the IRA Planning section of The CPA Journal. This column originally appeared in a blog for Financial Planning, a SourceMedia publication.