Rich Carreiro <rlc-news[at]rlcarr.com> writes:
- quote -

As far as I can tell, it's a little messier than that,
though the point stands that from a bankruptcy protection
point of view, there may be a benefit in keeping the
IRA accounts separate rather than commingling. In
particular, it appears that the Bankruptcy Abuse (etc)
act of 2005 puts a $1 million cap on IRA contributions
and earnings on those contributions. However, rollovers
from company plans are exempt from the bankruptcy estate
completely.

In theory, if one's contributions (and the growth of
those contributions) was worth over a million, and you
commingled the funds with rollover funds, it appears
possible that in a bankruptcy, one would have to try
to disentangle those to see what part is capped and
what part is not.

Of course, at least up until recently, the chances
that contributed amounts (and growth on them) could
be over a million bucks, given the long-time $2000
annual contribution cap (and even given the higher
current cap). (In the article I read, it pointed
out that if you had contributed the maximum to an
IRA from 1975 to 2005, your total contributions
would still have added up to only $63,500). But
over time, eventually, with the larger contributions
and the catch-up contributions - and the magic of
time - contributed portions of an IRA could in fact
exceed that $1million cap.

Anyway, it doesn't appear that commingling the funds
actually affects the cap or the protection - but could
make for seriously messy business if/when it becomes an
issue.

Having not actually read the details of the law (egad!)
but only an article or two on it, it's not entirely
clear to me where this protection of pure rollover IRA
funds comes from, since once the money's rolled from a
401k into an IRA, it's no longer covered by ERISA.

If you're really concerned about creditor protection,
it appears the ultimate in safety is leaving it in your
employer's 401k. That's one reason not to roll over to
an IRA, regardless of whether one commnigles or not.

- quote -

For what it's worth, I actually keep a separate IRA account
which was funded only with non-deductible contributions, but
I started doing that well before they lifted the ban on
rolling over commingled funds. Being somewhat conservative
in these things, even though it appears that the reasons to
keep some of these things separate are no longer as pressing
as they used to be, I think I'd still advise anyone
considering a rollover to do so to a separate IRA account
from any contributory IRA.

Thanks for the corrections.


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Are you posting responses that are easy for others to follow?
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Joenospam's 72t scenario is both correct and common. The IRS pubs are
somewhat unclear, but Private letter rulings 9050030 and 9525062
uphold that 72t calculations are based on individual, not aggregate,
accounts.

I have 3 "early retirement" clients that have done this for many years
with no trouble. Accurate record keeping is important, however, as
some less meticulous brokerage companies fail to accurately report box
7 of the 1099, which results in the client having to file a form 5329.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

You mean $10k, I presume.

- quote -

I think I finally get what you're saying about how one could
"game" the Roth-Conversion-Recharacterization system with
multiple accounts, all with gains after the conversions. The
smaller gains would have happened anyway if the conversion
amounts had instead just been left in the Trad. IRA. But
since one does not know in advance which allocation will do
best, one can divide the Roth IRAs according to allocation,
and see which does best.

Sorta still begs other questions like whether to guess where
the peak of the run-up in the Roth IRAs occurs in the
maximum of 15.5 months one has to recharacterize.

- quote -

If it really can be considered a loophole, it's a mighty
tiny one.

Still not sure about Rule 72(t) but will buy (without
repeating) Joenospam's report until I read otherwise.

Also, it probably bears mentioning again (as I believe Rich
C. often reminds) that "the next tax bracket" is not as big
a threat as people often take it to be, since it's only
every dollar above the limit of the tax bracket that gets
taxed at the higher rate.

Elle wrote:
- quote -

I think that summarizes this concept pretty well.
Recharacterizing the accounts with losses makes sense. The multiple
account strategy can allow the converted money to be the sum with the
best jump in value, but it's the bracket issue that would suggest that
an account that went up still be re-characterized.

Practically speaking, if one had say $30K and only wanted to convert $10
due to the bracket issue, I see no harm in a three account strategy.
Again, this is not mainstream advice, just one of the many odd
strategies out there. (and whoever said it - I agree this was not
congress' intention, they can easily close this loophole by stating a
'one Roth regardless of number of Roth accounts' rule)
JOE
www.blog.joetaxpayer.com

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

Will Trice, I see your citation too. I also note that in Pub
590 page 31 worksheet 1-3, line 3 is the Fair Market Value
of the IRA before the conversion plus or minus (as
appropriate) any transfers. The inclusion of transfers
minimizes monkeying with multiple accounts to one's
advantage.

Re Joetaxpayer's ten Roth IRAs example: For maximum tax
advantage, and while still getting some amount converted
each year, the owner should recharacterize yada all the Roth
IRAs that show losses. But if there are no losses, then by
my reckoning the multiple Roth IRAs strategy has no
advantage.

On the third hand, the other popular criterion for how much
one's net total Trad-to-Roth conversion should be is to keep
one handily out of the next tax bracket. By
recharacterizing, one

All as Will was suggesting.

Elle wrote:


- quote -

From the link you posted earlier: "The rules allowing
recharacterization of conversions apply to each individual Roth IRA
separately. So if you did five separate conversions, you could then
choose to recharacterize a subset of the conversions."

When one converts from their IRA, the pre and post-tax money may not be
allocated, it's treated as one IRA per person regardless of the number
of sepaerate accounts containing them. But it appears that each
comversion may be undone on an account by account basis. To Will's point
earlier, the gains may be minimal and not worth the effort, again,
depending on the size of the total original IRA portfolio.
JOE

Elle wrote:
- quote -

I think they can be treated separately for the purposes of
recharacterization, as long as they are rolled into separate Roth IRAs
as well. This is what Pub. 590, pg. 32 says:

"More than one IRA. If you have more than one IRA, figure
the amount to be recharacterized only on the account from
which you withdraw the contribution."

I guess you wouldn't even need to start with 10 tradtional IRAs, you
could probably just roll different assets from one tradtional into 10
Roths and accomplish this? Then recharacterize 9 back to the single
traditional? But I would think that this trick is only useful in a few
edge cases.

-Will

william dot trice at ngc dot com

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

I thought that, while one may have multiple Roth IRA
accounts at multiple institutions, the law sees the Roth
IRAs' owner as having exactly "one Roth Individual
Retirement Account."

So for example I think it is the owner's responsibility to
ensure the sum of all contributions to the multiple Roth
accounts each year does not exceed $5000 for a single person
under age 50, etc. Likewise with Rule 72(t)'s application
(per joenospam's post) and conversion/recharacterization
maneuvers (per joetaxpayer's post). I think one has to
compute recharacterizations based on the total of all the
Roth accounts the person has.

Generally, it the total has declined by "a lot,"
recharacterizing may make sense. But one cannot treat each
institution's Roth IRA separately for the purpose of
computing recharacterizations.

I got this little lesson when I recharacterized a year ago
and the figure was not what I expected. I asked my
broker/custodian (Fidelity) "what's up?" and the Fidelity
tax rep explained it to me in something like two sentences.
What she said seems consistent with the law. Congress (or
maybe financial industry lobbyists?) really does (do) not
want people monkeying around too much with
recharacterizations. From my reading, the main purpose of
IRA recharacterization rules is to help those folks who
found themselves in a higher tax bracket than originally
anticipated when the conversion took place. They did not
want to help people "work the system" willy nilly.

Maybe I am misreading you all, or maybe this helps somewhat
with Will's question. I too was a little confused when I
first read the two Joes proposals here.

Will Trice wrote:
- quote -

Will, I think I see your point. Yes, this works if one has the
need/desire to convert only so much per year. And the sucess of this
strategy is based on the difference in returns of the split accounts.
You are right, my example has $21K taxed, so if the investor is able to
convert all at once this strategy is less beneficial, unless of course,
the highest fraction goes up a great amount, and the remaining ones
average a loss. See that link Elle offered, I don't know that I can
explain it any better.
JOE

joetaxpayer wrote:
- quote -

Again, just being dense, but I'm still not following you. I probably
don't understand your example, so I'll try to reiterate it. At the
beginning of year 1, I convert two $10k traditional IRAs to Roth. One
gains 10% and one gains 30%. I undo the conversion on the account
gaining 10% and reconvert it when the rules allow at something like $11k
in year 2. So over two years I'm taxed on $21k of conversions. But if
I had not undone the conversion, I would have been taxed on $20k. If
this is not a tax bracket headroom strategy, then I'm drawing a blank.

-Will

william dot trice at ngc dot com

Will Trice wrote:
- quote -

Skip the interim step for a moment. Just consider my last thought above.
"what would you rather, having it split $11K IRA/ $13K Roth or the
reverse?" $13K in the regular IRA would mean $2K more that would be
taxed at conversion time. In my example, the second year only $11K is
converted and taxed. Within the constraints of Elle's link details at
http://www.rothira-advisor.com/rothira_uncertainty.htm and the limits of
one's patience for details, this can squeeze out a bit of tax savings
overall, not just if one is bumping their bracket's top.

Again, I've not used this strategy at all, I've always targeted the
'bracket top off' when doing conversions.
JOE

kastnna wrote:

- quote -

I actually did this back in 2001 or so during the bear market. In fact,
I think I did it two years in a row... The rules have changed since then
adding stricter caveats, but I can look up the details for my case if
there is interest.

-Will

william dot trice at ngc dot com

joetaxpayer wrote:
- quote -

I'm probably still being dense, but if the intent is to convert at the
lowest tax rate, why would you reverse the conversion at all? Or is the
presumption that the converter only has $10k of headroom in the current
tax bracket?

-Will

william dot trice at ngc dot com

"kastnna" <kastnna[at]auburnalum.org> wrote
- quote -

Caveat 1
There are also rules limiting the frequency of conversions,
recharacterizations, and reconversions. You may not make a
Roth conversion, "unconvert" it and reconvert the same IRA
money in the same year. [Footnote 4] Even if you straddle
different calendar years, you must still wait 30 days before
reconverting a Roth IRA that you had previously converted
and "unconverted." [Footnote 5]
See http://www.rothira-advisor.com/rothira_uncertainty.htm,
among other sites and cites.

Caveat 2
The amount re-characterized will depend, inte alia, on how
the Roth IRA's entire contents have performed. For example,
if 1) one first does a partial conversion from Trad IRA to a
Roth IRA; (2) that partial conversion is a small fraction of
the Roth IRA; (3) the original amount in the Roth IRA
increases in value while the small partially converted
amount decreases; then re-characterizing is not necessarily
going to get one very far and may even be a setback.

- quote -

Right. It's a little stricter and less feasible than your
post would lead one to believe IMO.

On Jan 15, 4:24*pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:

- quote -

There's another "fancy" scheme like this that can be used if any of
the accounts decline in value. The idea is that if you convert to
Roth, and the account subsequently declines in value, you can reverse
the conversion and then convert again to a Roth. Since the account
value is lower for the second conversion (which is now the first
conversion acknowledged by the IRS), the taxable amount is also lower.
This can be done repeatedly until the account stops declining.

There are time windows that must be followed to keep everything legit
with the IRS. I have never done this for myself or a client (and
hopefully never will), so anyone interested will need to dig into the
details on their own.

Will Trice wrote:
- quote -

Presume the intent is to Roth one's money at as low a (tax) rate as
possible.
Start with 2 accounts each $10K. One goes up 10%, the other, 30%.
Since either way the amount converted and taxable is $10,000, what would
you rather, having it split $11K IRA/ $13K Roth or the reverse?

I can see how this strategy, while a bit convoluted, is legal and does
provide an advantage if the numbers are high enough. I've done numerous
Roth conversion transactions for clients, never a reversal, so I am not
familiar with the paperwork need at reversal time or what paper shows up
in Feb. for taxes (on the reversals).

To answer pointedly - the benefit is captured only if the highest return
is well above the average. Again, I don't claim this to be my idea, it's
just out there.

JOE

joetaxpayer wrote:

- quote -

I'm probably being dense, but assuming all accounts have positive
returns, what's the benefit?

-Will

william dot trice at ngc dot com

joeNOSPAM[at]bea.com wrote:

- quote -

A similar strategy I read some time back: Same split as above, ten
accounts. Invest each in its own market sector so the total portfolio is
properly diversified. Convert all to Roth. At year end, leave the Roth
only for the top performing account (if positive), undo other 9
conversions. I am not advocating this, it did strike me as a bit over
the top.
JoeTaxpayer

I found another reason someone might want multiple IRAs. For anyone
who
contemplates withdrawing before age 60, under the substantially-equal-
payments
plan, to avoid penalties, this substantially-equal-payments program
applies
on a per-IRA basis, so if you have 10 IRAs you can create 1-10
separate
withdrawal plans at separate times and separate rates as needed, but
with
only one IRA you would have to make only one withdrawal plan that
would
have to cover all your needs for the 5 years or till you're 60,
whichever is later.
Joe

BreadWithSpam[at]fractious.net writes:

- quote -

(1) I believe an IRA account funded solely with qualified
plan rollovers has a higher bankruptcy exemption amount
than one commingled with annual contributions.

(2) Even though commingled IRA accounts now can be
rolled back into a qualified plan, some (many?) custodians
won't allow rollovers into a qualified plan from
a commingled account because it is a Very Bad Thing(tm)
for everyone if non-deductible IRA contributions
end up in a qualified plan. While such a prohibition
won't guarantee that won't happen, it does significantly
lower the odds of it happening -- presumably down to
the custodian's comfort level.

--
Rich Carreiro rlc-news[at]rlcarr.com