Roth IRA Conversion Quiz
By now, CPAs have heard much about Roth IRA conversions made widely available in 2010. Take the following test to see how much you’ve learned.
TRUE OR FALSE?
1. Starting in 2010, there are no income limitations to make regular contributions to a Roth IRA.
2. Roth IRA investment income is always tax-free if received after age 59½.
3. A 10% penalty never applies to a Roth IRA distribution if the owner is over age 59½.
4. Dividing an individual retirement account (IRA) into various IRAs, each holding a different investment asset class, before converting them to Roth IRAs is a strategy that allows taking advantage of market volatility.
5. The deadline for a 2010 Roth conversion is April 15, 2011.
6. The deadline to recharacterize a Roth conversion is Oct. 15 of the following year.
7. A client who has only made nondeductible contributions to a sole IRA can convert it to a Roth IRA and pay no taxes on the conversion of earnings.
8. The first distribution taken from any Roth IRA is considered to come from regular contributions, even if contributions were made to a different Roth IRA.
9. An inherited IRA cannot be converted to a Roth IRA, while an inherited employer plan can be.
10. The original owner of a Roth IRA can always choose to take the money out, but is never required to.
11. A Roth conversion cannot be done in a year when the taxpayer has no compensation income.
12. A traditional IRA converted to a Roth IRA with a trustee-to-trustee transfer automatically transfers the beneficiary designation to the Roth IRA.
13. Distributions from a Roth IRA are not counted as income for the calculation of taxes on Social Security benefits.
14. Assets recharacterized can be reconverted at the later of (1) the beginning of the year after the year of recharacterization, or (2) the end of the 30-day period beginning on the day of the recharacterization.
ANSWERS
1. False. Income limitations no longer apply to conversions, but still apply to regular contributions.
2. False. A second requirement is that it is received after a five-year period beginning Jan. 1 of the year the client first established a Roth IRA. Some exceptions apply.
3. True. Age is one of several exceptions to the 10% penalty.
4. True. The idea is to keep the accounts that go up in value and recharacterize others.
5. False. The deadline is Dec. 31, 2010. Therefore, a conversion (unlike a contribution) cannot be evaluated when a tax return is being finalized.
6. True. A conversion can be made by Dec. 31, and then recharacterized (even partially) before Oct. 15.
7. False. Taxes are due on the conversion of earnings from nondeductible contributions.
8. True. The complex Roth IRA distribution rules apply to the aggregate of the client’s Roth IRAs.
9. True. However, a surviving spouse can roll over to a spousal IRA, then convert to a Roth IRA.
10. True. Taxes and a penalty may apply, but the option to take the money out is always available. Required minimum distributions (RMDs) apply to beneficiaries, with a possible exception for a surviving spouse.
11. False. Unlike a contribution, a Roth IRA conversion can be made regardless of compensation income.
12. False. Remember that beneficiary designations should be made on all new IRAs.
13. True.
14. False. Assets recharacterized can be reconverted at the later of (1) the year after the year of conversion, or (2) more than 30 days after recharacterization.
Jean-Luc Bourdon (jeanluc@walpolecpa.com) is a wealth manager with Walpole Financial Advisors LLC in Goleta, Calif.
A version of this column originally appeared in the AICPA CPA Insider e-newsletter. The AICPA Insider Group’s e-newsletters deliver news, commentary, recommended products and professional development resources, covering individual and corporate taxes, corporate finance, wealth management and careers. Sign up for free at cpa2biz.com/newsletters.
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