By Ian Berger, JD
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When converting an IRA to a Roth IRA, do the investments (stocks, bonds, ETFs, etc.) have to be sold or can they be transferred directly from the IRA into the new Roth account?
There is no requirement that investments be sold before a Roth conversion. If the same custodian will be holding the converted funds, the custodian will simply retitle the existing traditional IRA account as a Roth IRA with the same investment portfolio. If it is a partial conversion, the custodian will transfer the appropriate number of shares from the traditional IRA to the Roth IRA. If a new custodian is used, the conversion can usually be done via a direct transfer (also known as a trustee-to-trustee transfer). However, if you hold certain unconventional investments, it’s possible the new custodian won’t accept them.
Can someone, age 70, do a rollover of a 20-year old Roth 401(k) with a former employer to a new Roth IRA without having to start the 5-year clock all over again?
Thanks for any help you can provide.
This is a complicated issue. The 5-year clock on the new Roth IRA does have to start over again, but only for determining whether earnings credited after the rollover can come out tax-free. The period that the funds were held in the 401(k) does not carry over to that 5-year clock, so it starts fresh on January 1 of the year the new Roth IRA is established. That’s why it’s important to fund a Roth IRA (even with a small contribution) as early as possible in order to get the Roth IRA clock started. The good news is that the rolled-over funds themselves (both Roth 401(k) contributions and earnings credited before the rollover) can be distributed tax-free at any time after the rollover. That’s because the Roth 401(k) owner in this case was at least 59 ½ at the time of the 401(k) distribution and held the Roth 401(k) for at least 5 years. All of the former Roth 401(k) dollars go into the Roth IRA as essentially one big contribution, and Roth IRA contributions are always immediately available tax- and penalty-free.