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 & have more money to spend during your retirement? If you answered yes to any one of those questions, 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, you may want to carefully read the information below. Not everything will pertain to you, so feel free to skip to the parts that do!

IRA Rollovers to the Self-Directed Roth IRA Conversion

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 Go About Doing a Self-Directed Roth IRA Conversion

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 to a Self-Directed Roth IRA

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. We’d love to help you!

 

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