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Simple IRA question
Old 04-04-2010, 07:42 AM   #1
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Simple IRA question

I'm helping a friend transfer some assets out of Amerprise and Vilec (sp?) and have a simple question.

Can what is noted at Vilec as a "Traditional Rollover IRA" be rolled to Vanguard into a Roth or does it have to be rolled to a traditional IRA? I assume since it says its a rollover IRA, it was already rolled from somewhere else in the past but my friend is clueless and doesn't know. I guess the question is can a traditional IRA be rolled into a Roth and if so, are there tax consequences?

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Old 04-04-2010, 07:53 AM   #2
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Technically, this is a conversion to a Roth IRA. Yes, there are tax consequences. There are lots and lots of articles on Roth conversions this year since the income restrictions have been removed temporarily.

So for sure one can switch custodians of the rollover IRA (i.e. transfer the IRA from Valic to Vanguard). Then one can convert the rollover IRA to a Roth IRA. Any previously untaxed portion of the converted amounts will be included as income on the tax return.

The taxes could be as little as $0 or quite substantial depending on what else is on the tax return. Thus, it can be savvy or unwise to convert to a Roth.

I'm going to guess that the confusion is about vocabulary: Is a rollover IRA the same as a traditional IRA? In this case, probably yes. If originally the money was in a company-sponsored 401(k) or 403(k) and it was rolled over into a traditional IRA.

(If the money was originally in a company-sponsored Roth 401(k) or Roth 403(b) and then rolled over into a Roth IRA, it would be in a rollover Roth IRA. This is unlikely.)

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Old 04-04-2010, 09:28 AM   #3
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If your friend is clueless about its origins then, unless the holding company has a record, I think the cost basis is going to be zero, which means that conversion to a Roth IRA will have the whole sum subject to income tax.
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Old 04-04-2010, 12:13 PM   #4
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The amount is only about $2000 so the tax amount wont be huge, but if they dont convert it to a Roth, I cant transfer it to Vanguard because it would be separate from the Roth they already have and you can't open an IRA at Vanguard with only $2000.

So it's convert to Roth and pay tax next year, or don't transfer it at all, correct? Not transferring isn't a real option because I'm trying to get them away from Valic and Ameriprise, not to mention consolidating numerous accounts all at Vanguard for simplicity.
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Old 04-04-2010, 12:30 PM   #5
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Unless Vanguard has changed their rules, there is at least one fund (the STAR fund) which has only a $1000 lower limit to open for an IRA. I did this a few years back for each of my kids as I didn't have the $3K to $25K minimum for some other funds I might have preferred. Actually, their STAR funds have done reasonably well, all things considered. Again, the amount to open may have changed. I'm too lazy to look for you.
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Old 04-04-2010, 07:27 PM   #6
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A caution about VALIC. This may be an annuity. My daughter had a retirement plan with VALIC at a former employer. They have a penalty if you move funds from them within 7 years. (7% the first year, 6% the second, 5% the third, etc.) Make sure yur friend reads the fine print.
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Old 04-04-2010, 08:00 PM   #7
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I think this is relevant to at least part of your question - what I seemed to have learned is that if you want to move any kind of IRA from one company to another, you must move it in whatever form it is (Trad Ira-> Trad IRA; Roth IRA -> Roth IRA, etc). Once moved, you can then convert it (within regulations).

I spent too much time on the vanguard and fidelity websites trying to figure out how to move/convert in one step. One phone call and they explained that the process must be move, then convert. When you understand some of the tax implications, it makes some sense.


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