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Esoteric Roth IRA Question
Old 10-16-2007, 11:02 AM   #1
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Esoteric Roth IRA Question

A friend of mine asked me a question about funding a Roth IRA of which (believe it or not) I did not have the answer to.

So here's the introduction to the problem and the question.

The friend is going to start taking pension distributions from a pension that was partially funded from after tax (employee) payments as well as company funded payments. When the pension distributions are made that portion of the pension payment that was funded with after tax payments is tax-exempt meaning that income taxes have already been paid on it. The remaining distributions that are not tax-exempt will then require the usual income tax payments.

It is clear that the taxable portions of the pension can continue the tax deferment by rolling that (taxable) portion over into a normal (taxable when withdrawn) IRA.

The question then is...

Can the tax-exempt portion of the pension payment be rolled over into a Roth IRA such that that portion of the money can grow tax-free.
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Old 10-16-2007, 12:33 PM   #2
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What type of pension are you talking about?

I had a 401k with some after tax contributions in it and when I rolled it over to an IRA I had the after tax money distributed to me. This has no tax implications. Then you can do what wever you want with that money.
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Old 10-16-2007, 12:33 PM   #3
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Originally Posted by MasterBlaster View Post
Can the tax-exempt portion of the pension payment be rolled over into a Roth IRA such that that portion of the money can grow tax-free.
Roths are usually funded with after-tax money in the first place, so it sounds possible. The money would go into a conventional IRA with a basis equal to the amount of the IRA and then there'd be a Roth conversion. Value equal to the basis would mean zero taxes.

But you might want to post this question at Ed Slott's IRA Help discussion board for the CPAs to chew over.

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Old 10-16-2007, 12:34 PM   #4
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I have never heard of a roll-over Roth IRA.

You can do two things in my opinion:

1) Roll over the whole pension to an IRA. Keep the taxable portion in the IRA and convert the tax-exempt portion to a Roth IRA. Since it's tax-exempt money you should be able to convert it tax free (though you may have to prove that the money has already been taxed).

2) Roll over the taxable portion to an IRA and place the tax-exempt money in a taxable account. Then each year take $4,000 out of the taxable account and invest it in a Roth. That second method could be the way to go if you just have a few thousand dollars in tax-exempt money to invest.
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