Q: My husband recently passed away, and I am the beneficiary of his four Individual Retirement Accounts and a 403(b) account.
I want to transfer the 403(b) into my own 403(b) account.
Three of the IRAs are Roth accounts, and one is a rollover IRA. I was hoping to move all of the IRAs into one account to take advantage of compounding. I assume the best way to do this is to have athe IRAs transferred directly from one custodian to another
Can the Roth IRAs and the rollover IRA be combined in a new account? -- LS, via email
A: No, no!
(The extra no! is because even if you could legally combine them in one account, you wouldn't want to.)
Let's start by pointing out that you are the surviving spouse of the person who originally owned these retirement accounts. That's important because it gives you more options and more flexibility than any other beneficiary.
In other words, non-spouse beneficiaries shouldn't use this post as a guide!
Your 403(b) question first, since it's simpler. The law now allows you to transfer money from one 403(b) plan into another. However, no 403(b) plan is required to accept transfers. Find out what your plan's rules are. If it accepts transfers, the best way to do this is by arranging for your late husband's plan to switch his account directly to your own plan.
Okay, what about the IRAs?
For those who don't remember the rollover IRA, it's a traditional IRA that contains only money transferred from an employer-sponsored retirement plan like a 401(k). By keeping this money segregated as a 'rollover' IRA, you preserved the option to transfer it back into another 401(k) plan at some future date.
Rollover IRAs are no longer necessary, because the law has been changed to permit you to transfer IRAs into a 401(k) plan even if those IRAs weren't originally created with 401(k) plan contributions.
Okay -- you've inherited three Roth IRAs and one traditional IRA. Roth IRAs and traditional IRAs can't be combined because they are taxed very differently.
Your withdrawals from a Roth IRA are tax-free. Your withdrawals from the traditional IRA are taxable. Even if the law allowed you to combine them, it would be foolish to mix a tax-free account with a tax-deferred account. (It's a real headache to take withdrawals from an account that's part tax-free and part tax-deferred. Just ask anyone who's taking money from a traditional IRA that includes both pre-tax and post-tax contributions!)
You can combine the three inherited Roth IRAs into a single Roth IRA in your name. And you can put the rollover IRA into a new traditional IRA account in your own name. And yes, a trustee-to-trustee transfer is always the best way to move IRA money.
Once the traditional IRA is in your name, you can convert it into a Roth IRA, if you wish -- but there's a price tag. Money you move from a traditional IRA to a Roth IRA is taxable; so if you convert $50,000 into a Roth IRA, you'll owe income taxes on $50,000.
In exchange, you get an account that is tax-free going forward: After you've owned the new Roth IRA for at least five years AND you're 50 and a half or older, all your withdrawals are tax-free. What's more, you never have to take Roth withdrawals if you don't want to. You can let the account keep growing tax-free and leave it to your kids.
By contrast, if you keep this money in a traditional IRA, you will have to start taking withdrawals after you're 70 and a half; and they will be taxable.
And here's a tip from IRA expert Barry C. Picker: If you decide to do a conversion, keep the new converted Roth IRA separate from your existing Roth IRA -- the one you created from the three inherited Roth IRAs -- until after October 15 of the year following the conversion.
The reason: If you change your mind about the conversion, you have until October 15 of the following year to undo it and turn your new Roth IRA back into a traditional IRA. (And yes, if you've already paid the tax on the conversion, you get a refund.) If you keep the converted Roth separate, it's easy to undo the conversion. You can still undo the conversion if you add it to an existing Roth account, but it won't be as simple. You'll have to calculate the appropriate amount to return to the traditional IRA. If you converted to a brand new Roth IRA, you can just move the entire account back.
I want to transfer the 403(b) into my own 403(b) account.
Three of the IRAs are Roth accounts, and one is a rollover IRA. I was hoping to move all of the IRAs into one account to take advantage of compounding. I assume the best way to do this is to have athe IRAs transferred directly from one custodian to another
Can the Roth IRAs and the rollover IRA be combined in a new account? -- LS, via email
A: No, no!
(The extra no! is because even if you could legally combine them in one account, you wouldn't want to.)
Let's start by pointing out that you are the surviving spouse of the person who originally owned these retirement accounts. That's important because it gives you more options and more flexibility than any other beneficiary.
In other words, non-spouse beneficiaries shouldn't use this post as a guide!
Your 403(b) question first, since it's simpler. The law now allows you to transfer money from one 403(b) plan into another. However, no 403(b) plan is required to accept transfers. Find out what your plan's rules are. If it accepts transfers, the best way to do this is by arranging for your late husband's plan to switch his account directly to your own plan.
Okay, what about the IRAs?
For those who don't remember the rollover IRA, it's a traditional IRA that contains only money transferred from an employer-sponsored retirement plan like a 401(k). By keeping this money segregated as a 'rollover' IRA, you preserved the option to transfer it back into another 401(k) plan at some future date.
Rollover IRAs are no longer necessary, because the law has been changed to permit you to transfer IRAs into a 401(k) plan even if those IRAs weren't originally created with 401(k) plan contributions.
Okay -- you've inherited three Roth IRAs and one traditional IRA. Roth IRAs and traditional IRAs can't be combined because they are taxed very differently.
Your withdrawals from a Roth IRA are tax-free. Your withdrawals from the traditional IRA are taxable. Even if the law allowed you to combine them, it would be foolish to mix a tax-free account with a tax-deferred account. (It's a real headache to take withdrawals from an account that's part tax-free and part tax-deferred. Just ask anyone who's taking money from a traditional IRA that includes both pre-tax and post-tax contributions!)
You can combine the three inherited Roth IRAs into a single Roth IRA in your name. And you can put the rollover IRA into a new traditional IRA account in your own name. And yes, a trustee-to-trustee transfer is always the best way to move IRA money.
Once the traditional IRA is in your name, you can convert it into a Roth IRA, if you wish -- but there's a price tag. Money you move from a traditional IRA to a Roth IRA is taxable; so if you convert $50,000 into a Roth IRA, you'll owe income taxes on $50,000.
In exchange, you get an account that is tax-free going forward: After you've owned the new Roth IRA for at least five years AND you're 50 and a half or older, all your withdrawals are tax-free. What's more, you never have to take Roth withdrawals if you don't want to. You can let the account keep growing tax-free and leave it to your kids.
By contrast, if you keep this money in a traditional IRA, you will have to start taking withdrawals after you're 70 and a half; and they will be taxable.
And here's a tip from IRA expert Barry C. Picker: If you decide to do a conversion, keep the new converted Roth IRA separate from your existing Roth IRA -- the one you created from the three inherited Roth IRAs -- until after October 15 of the year following the conversion.
The reason: If you change your mind about the conversion, you have until October 15 of the following year to undo it and turn your new Roth IRA back into a traditional IRA. (And yes, if you've already paid the tax on the conversion, you get a refund.) If you keep the converted Roth separate, it's easy to undo the conversion. You can still undo the conversion if you add it to an existing Roth account, but it won't be as simple. You'll have to calculate the appropriate amount to return to the traditional IRA. If you converted to a brand new Roth IRA, you can just move the entire account back.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
(c) Lynn Brenner, All Rights Reserved
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