So you want to rollover your traditional 401K or Traditional IRA. However, it’s year end-December 31st. The company that is sending the IRA rollover to the new company on your behalf has already processed the Rollover and is in the process of preparing the 1099R.
The new company is enjoying the holidays and doesn’t process the rollover until January 8 which is within the 60 day window. Just a note that January 8th is a date that I randomly choose out of the blue but could be realistic.
You however decide that you don’t want to roll the Traditional IRA or 401K into another IRA account. Instead, you want to roll the IRA into a Roth IRA which triggers the IRA to Roth Conversion rules.
Two issues arise. We will use 2012 and 2013 as examples in the scenario.
1. The 2012 1099R you will receive is showing that it a tax-free rollover.
2. Two years are affected – 2012 (Prior Year) and 2013 (Current Year).
Traditional IRAs and 401Ks are not taxed until distributed. Roth IRAs and Roth 401Ks are taxable on the front end when you contributed the money to the account. The distributions on earnings are tax-free if you meet the minimum holding requirement.
Since the conversion didn’t take place until the current year (2013 , the rollover is not taxable income in 2012 based on the 1099-R.
In 2013 in the year the conversion from traditional to Roth took place, the 2012 distribution is taxable income.
Traditional IRA to Roth Conversions are simple but can be confusing. That’s why tax planning is important.
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