roth conversion ,can you cherry pick

[mathjak107]

im not sure how the mechanics of the conversion work but if i own 6 funds in my tira and i want to cherry pick only the stock funds but not the bond funds from it for roth conversion can you ?


do they break out those funds and move just those funds to a roth charachterized account? do they actually sell them and rebuy them or do they just move them?

just wondering because fidelity has a thing about round trips and usually buying in one account and selling the same fund in another flags it as a round trip

[nwsteve]

Mathjak
I also have Fido. They told me I can move a position in total or move $$. The entire market value of the amount is considered taxable income unless you made non-deductible contributions to the IRA.
Nwsteve

[tmm99]

As far as I know, you cannot cherry pick funds. You cannot even cherry pick accounts. Non-deductible, tax-deferred, etc ... they all go in one pot. Kind of like after you put milk in coffee you cannot just extract the milk out of the coffee mug.

[clifp]

I don't know how Fido works but with Schwab a couple of years ago I absolutely cherry picked which funds to convert.

I created 3 different Roth IRAs at the beginning of the year, in one IRA I transferred in domestic mutual fund, in the 2nd a Korean ETF, and the third an individual stock.

No selling of any funds/stocks was involved the security were transferred in kind.

I then waited until Nov and rolled back my Roth Conversion (re characterized in IRA-speak) for the individual stock and domestic mutual fund, leaving the Korean fund in one Roth account, and shutting down the other two.

You actually have until Oct of the next year (i.e. extension date) to figure out which stocks to keep and which to re-characterize. So if you change your mind you have have until Oct 15,2010. There are a bunch of rules but the process was pretty straightforward and profitable.

[mathjak107]

ill call them when i get some time and see if i can cherry pick just the funds i want converted

[kaneohe]

Quote:

Originally Posted by tmm99 As far as I know, you cannot cherry pick funds. You cannot even cherry pick accounts. Non-deductible, tax-deferred, etc ... they all go in one pot. Kind of like after you put milk in coffee you cannot just extract the milk out of the coffee mug.

I suspect you are thinking about the tax treatment of the conversion.
If you had each fund in a separate account, I'm pretty sure you could select which one to convert tho the tax treatment would be as you suggest. If all the funds were in the same account, I would guess the same would be true as clifp suggests, but I have no direct experience.

[Gotadimple]

You can absolutely convert an asset. I did that earlier this year at Schwab with no problems. The asset is moved and the value for taxation purposes is value of the asset at the then current market rate.

-- Rita

[tmm99]

Quote:

I suspect you are talking about the tax treatment of the conversion.

Exactly. I was thinking about the tax implication. I guess I didn't read the whole post.

[clifp]

Quote:

Originally Posted by kaneohe I suspect you are thinking about the tax treatment of the conversion. If you had each fund in a separate account, I'm pretty sure you could select which one to convert tho the tax treatment would be as you suggest. If all the funds were in the same account, I would guess the same would be true as clifp suggests, but I have no direct experience.

From my understanding it is helpful (and possibly critical) to create separate accounts to do the recharacterization. In fact, although it is somewhat painful logistically to have lots of separate IRA, it is gives you a lot of flexibility on future withdrawals. For instance, if you have separate IRA you can make 72(t) distribution from one account, and not from the other.

[kaneohe]

Quote:

Originally Posted by clifp From my understanding it is helpful (and possibly critical) to create separate accounts to do the recharacterization. In fact, although it is somewhat painful logistically to have lots of separate IRA, it is gives you a lot of flexibility on future withdrawals. For instance, if you have separate IRA you can make 72(t) distribution from one account, and not from the other.

It is also helpful if you are making rollovers (as opposed to direct transfers) which you can only do once every 12 mos. If you have separate accounts, you can do more. I prefer to do the direct transfers, but when I get charged $25 each time, I go the non-preferred way. I think, but am not sure, that if you get senile and violate the 12 mo. rule, you jeopardize less of the IRA to complete and immediate taxation......will have to check on details to be sure. edit: sorry, error on my part here. Only the forbidden transaction is subject to taxation and penalty, not the whole account.
from a google search:


MOVING PARTS

For each IRA, you can do a rollover no more than once every 12 months (the once-per-year IRA rollover rule). If someone has done a rollover to or from an IRA within the past 12 months, they must wait until 12 months (365 days) have passed before doing a rollover from the same IRA. What happens if they violate the 12 month rule? They will owe income tax on the second withdrawal, plus 10% penalty if they are under age 59½, and those funds are no longer IRA funds.

[meridiver]

You absolutely can cherry pick and Fidelity should allow you to just transfer the fund position over to the Roth account. I did this in my Schwab accounts last year. I had about five different funds in my IRA. I chose three of them that added up roughly to the dollar amount that I wanted to move, called up Schwab and requested a transfer of each fund into my existing Roth account. They did the transfer first thing the next morning. My taxable income from the conversion was based on the funds' market value at the end of the day that I placed the order.

If you have mixed both deductible and non-deductible contributions in one IRA, what you can't do is choose to convert only the non-deductible contributions thus avoiding claiming any taxable income. For example, you can't convert 100% of your non-deductible contribs and 10% of your deductible contribs. if both are held in the same account. The IRS assumes that you are converting in equal proportions from both and taxes you accordingly.

[mathjak107]

good because thats what i want to do... i cant see paying all that tax to convert the bond funds in my TIRA ... i just want to convert the equity funds ...

[nwsteve]

One thing to remember per my Fido adviser today. Any conversion must remain a minimum of 5 years to excape tax, regardless of age at time of withdrawal. Separating your conversions into separate Roth accounts makes it a bit easier to keep their age separate. In the case of Fido, they told me it was the investor's responsibility to keep track of the "maturity" of any conversion. For that reason I am going to use separate Roth accounts for this years and next year conversions.
Nwsteve
Nwsteve

[kaneohe]

Quote:

Originally Posted by nwsteve One thing to remember per my Fido adviser today. Any conversion must remain a minimum of 5 years to excape tax, regardless of age at time of withdrawal. Nwsteve Nwsteve

Nwsteve, not sure the Fido rep is correct based on this nice flow chart from Pub 590 which suggests that if the original contribution that started any Roth IRA was over 5 yrs ago and you are over 59.5 when you withdraw, there is no tax regardless of the age of the conversion Roth. If this conversion is going to be the first Roth, that's a different situation.

[kaneohe]

Sorry, forgot to paste that link in previous post and library computer won't let me: here are some words from Pub 590. You can find this quote under Roth IRA distributions in table of contents if the link to flowchart here doesn't work.

What Are Qualified Distributions?





A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
2. The payment or distribution is:
   1. Made on or after the date you reach age 59½,
   2. Made because you are disabled,
   3. Made to a beneficiary or to your estate after your death, or
   4. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

This image is too large to be displayed in the current screen. Please click the link to view the image.

[teejayevans]

Quote:

Originally Posted by meridiver For example, you can't convert 100% of your non-deductible contribs and 10% of your deductible contribs. if both are held in the same account.

Doesnt matter if they are in same account or not, IRS treats all as 1 big bucket, minus Roths of course.
TJ

[nwsteve]

Quote:

Originally Posted by kaneohe Sorry, forgot to paste that link in previous post and library computer won't let me: here are some words from Pub 590. You can find this quote under Roth IRA distributions in table of contents if the link to flowchart here doesn't work. What Are Qualified Distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and The payment or distribution is: Made on or after the date you reach age 59½, Made because you are disabled, Made to a beneficiary or to your estate after your death, or One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

K
This is good input. I wonder how the IRS defines "contribution". If $$ are converted into an existing Roth account that is over 5 years old do the "new" $$ actually take on the anniversary date of the original contribution. If so, this would argue for converting into an existing Roth versus setting up new accounts. The way the Fido rep defined "contribution" was the actual amount being converted and the date of THAT conversion.
Any of our resident tax experts have further clarity on how the IRS defines contribution?
Nwsteve

[kaneohe]

You should get confirmation but I believe you don't need to convert into an existing Roth for the purpose making the distribution a qualified one later........there are 2 types of 5 yr clocks.......one from when you made a contribution (not conversion) into any Roth IRA
that applies to all your future Roth accounts; another which applies to each and every Roth conversion. If you made a contribution in the past to a Roth IRA, that started the clock running for the 5 yr period for qualifying distributions. If you make Roth conversions later and violate the conversion 5 yr clock, you could be taxed/penalized
unless you meet the contribution 5 yr clock AND one of those other conditions (e.g. 59.5).

It is often suggested that you convert into new Roths so that if you have to recharacterize later, it is simpler to control the results.

here's something to start with: http://www.fairmark.com/rothira/rolldist.htm

[nwsteve]

K
Very helpful link. While at Fairmark, found the following regarding the 5 year test which further confirms your understanding--which incidently was what I had before talking with the Fido rep.
Five-Year Test

The five-year test is satisfied beginning on January 1 of the fifth year after the first year you establish a Roth IRA. If you established a Roth IRA in 2004, for example, any distribution from a Roth IRA will satisfy the five-year test if the distribution occurs on or after January 1, 2009.
The five-year test is satisfied on January 1 even if you establish your Roth IRA late in the year. In fact, you're treated as if you established your Roth IRA in the previous year if you make the contribution on or before April 15 and designate it as a contribution for the previous year.
When you meet the five-year test for one Roth IRA, you meet it for all Roth IRAs. For example, suppose you contributed $500 to a Roth IRA in 2004. Three years later you decided to set up another Roth IRA and contribute $2,000. Both IRAs will meet the five-year test on January 1, 2009.
Five-Year Test

The five-year test is satisfied beginning on January 1 of the fifth year after the first year you establish a Roth IRA. If you established a Roth IRA in 2004, for example, any distribution from a Roth IRA will satisfy the five-year test if the distribution occurs on or after January 1, 2009.
The five-year test is satisfied on January 1 even if you establish your Roth IRA late in the year. In fact, you're treated as if you established your Roth IRA in the previous year if you make the contribution on or before April 15 and designate it as a contribution for the previous year.
When you meet the five-year test for one Roth IRA, you meet it for all Roth IRAs. For example, suppose you contributed $500 to a Roth IRA in 2004. Three years later you decided to set up another Roth IRA and contribute $2,000. Both IRAs will meet the five-year test on January 1, 2009.
Tax-Free Distributions from Roth IRAs
Thanks again for the info
Nwsteve

[nwsteve]

Here is more clarification from the WSJ today

"As for the person who converts to a Roth: In a conversion, you have to hold the assets in a Roth for five years or until turning 59½, whichever comes first, to make penalty-free withdrawals of your converted amounts. Here, each conversion has its own five-year clock.
If you already are 59½ and you convert traditional IRA assets to a Roth, you can withdraw the assets you convert at any time without worrying about a five-year deadline or penalties. Again, it is a different story with any earnings on those assets: You have to have held a Roth account for five years to withdraw any earnings tax free. But you generally don't need to worry about separating the converted funds from the earnings, since the withdrawal rules for Roth IRAs say that any distributions first come from contributions, then from conversions, and finally from earnings, says Ed Slott, an IRA consultant in Rockville Centre, N.Y."
Basics of 5-Year Rule on Roth IRAs - WSJ.com. This article is in the WSJ's weekend addition so if you can not get from WSJ a lot of newspapers have in their Sunday editions.
nwsteve