Friday, November 6, 2015

Rules of the Roth

Question:  Can I take a distribution from a traditional IRA, have taxes withheld, and roll the remainder into a Roth IRA? 

According to the IRS rollover chart (left), it is legal to roll funds from a traditional IRA into a Roth IRA, but the rollover must be included in income.  They want you to pay the taxes on it, one way or another.  But this still doesn’t explicitly state that I can have taxes withheld and put the balance of the rollover into the Roth IRA. 

I called Morgan Stanley, the holder of my traditional IRA.  I spoke to a nice man with a New York Accent named Sal.  He gave me the answer I was looking for.  Yes, I can roll over a portion of my traditional IRA to my Roth IRA, and yes, I can roll over the balance after taxes.  He told me I needed to start the paperwork at Scottrade (the holder of my Roth IRA) and that the paperwork would give me an option to specify taxes to be withheld.  He also told me that I would need a Medallion Signature Guarantee.  A what?

Per Wikipedia, “In the United States and Canada, a medallion signature guarantee is a special signature guarantee for the transfer of securities. It is a guarantee by the transferring financial institution that the signature is genuine and the financial institution accepts liability for any forgery. Signature guarantees protect shareholders by preventing unauthorized transfers and possible investor losses. They also limit the liability of the transfer agent who accepts the certificates.”  Makes sense. 

I found the Direct Conversion form at, filled it out, and hand carried it to our Scottrade branch office.  Turns out I should have started at the Scottrade branch office in the first place. Troy, the consultant, explained to me that transferring a part of my traditional IRA from one brokerage firm to another could cause confusion with the IRS.  Yikes – we don’t want that.  He recommended I open a new account for the traditional IRA, and then do the partial rollover.  That way the entire transaction shows up on the same statement.  Again, this makes sense – even if it might appear self-serving on the part of Scottrade.

Done.  And by the way, the Medallion Signature Guarantee is on the bottom of the form Scottrade sent to Morgan Stanley.  Now we wait for the transfer to take place so I can do the partial rollover.  

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