How to Convert Your Retirement Plan To A Self-Directed Roth IRA
Do you want to control what you invest in, have a greater variety of investment choices, and have more money to spend during your retirement? If so, then you may just want to convert your retirement plan to a Self-Directed Roth IRA.
If you’re considering making a big leap forward towards gaining more control over your retirement account, it’s a good idea to carefully read the information below. Not everything will pertain to you, but you’ll leave with a greater understanding of how these accounts work.
IRA Rollovers to the Self-Directed Roth IRA
Most of the time Roth IRA conversions and retirement plan rollovers to a Roth IRA are taxed. This is offset by the fact that you won’t have to pay tax on your future distributions.
A conversion is a taxable movement of cash or other assets, such as real estate, from a Traditional IRA, SEP IRA, or a SIMPLE IRA to a Roth IRA.
Note: A SIMPLE IRA can only be converted to a Roth IRA after a two-year period, which begins on the date your first SIMPLE IRA contribution was deposited.
Are There Any Eligibility Requirements to Do a Roth IRA Conversion?
There are no eligibility requirements for making a Roth IRA conversion.
Note: If you earn too much to make a Roth IRA contribution, you can contribute to a Traditional IRA instead and then do a Roth IRA conversion.
Roth IRA Conversion Taxes & Penalties
If you decide to convert your Roth account to a Self-Directed Roth IRA LLC structure, you will have to pay tax on the Roth IRA conversion on a “pro rata basis”. This means the portion representing pretax assets is taxable in the year of the conversion, and the portion representing after-tax assets is not taxable.
Also, you will need to file Form 8606 to determine the taxable portion of the conversion. You will need to list all the pre-tax IRA assets to determine the taxable and nontaxable assets.
How To Convert Into a Self-Directed Roth IRA
A Roth IRA conversion can be completed either via a direct or indirect rollover. So what’s the difference between the two?
A conversion in which the check is made payable to the receiving financial institution for the benefit of your Roth IRA is a direct conversion.
An indirect conversion occurs when you request and receive a distribution from your pre-tax IRA custodian and deposit the amount into a Roth IRA account within 60 days.
Note: With an indirect Roth IRA conversion, the one rollover per 12-month restriction does not apply.
Reporting a Roth IRA Conversion on Your Taxes
Since most conversions are generally subject to taxation, your financial organization distributing the pre-tax IRA assets will probably apply withholding rules to the account.
However, an exception applies to IRA funds being converted to a Roth IRA.
Note: A Roth IRA conversion is a reportable transaction regardless of whether it was handled directly or indirectly.
Direct Rollover to a Self-Directed Roth IRA
When you directly roll over your employee sponsored retirement plan distribution to a Self-Directed Roth IRA (excluding a designated Roth account rollover to a Roth IRA), your financial institution transferring the retirement funds must report the tax-free direct rollover distribution.
Note: The receiving Self-Directed Roth IRA custodian must report the amount as a rollover contribution in Box 2 of IRS Form 5498.
Indirect Rollover to a Self-Directed Roth IRA
If you’re eligible and take a distribution from your employer sponsored retirement plan (401k Plan) the financial institution sending your distribution should make the check payable to you.
If your distribution is eligible for a rollover, your financial institution will apply withholding.
You would then be required to deposit your money into a Traditional IRA account within 60 days. Once your funds have been deposited in a Traditional IRA account, your IRA funds can be converted into a Roth IRA.
Note: The new Self-Directed Roth IRA custodian receiving the rollover assets must report the amounts on IRS Form 5498 as a rollover contribution in Box 2.
If you have any questions about converting to a Self-Directed Roth IRA, feel free to contact Royal Legal Solutions at (512) 757–3994. Better yet, schedule your personal Roth IRA consultation today.