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 Scottrade.com, 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.
