Friday, August 12, 2016

Simplifying IRA Lingo

Sometimes terminology gets confusing with respect to IRAs. Here are just a few definitions of IRA terms and concepts that are commonly asked about:

The Required Beginning Date or RBD is the date that required minimum distributions must begin for all IRA owners, which is April 1st of the year following the year an owner turns 70½. If your RBD happens to fall on a holiday or weekend, the RBD will be the following business day.

RMD: The Required Minimum Distribution or RMD is the minimum amount an IRA owner must withdraw each year from an IRA after his or her RBD.  An IRA owner can always take out more than the RMD.  There are no RMDs for owners of Roth IRAs but beneficiaries of inherited Roth IRAs are still subject to RMD rules.

ROLLOVER: A rollover is when assets are withdrawn from a retirement plan and then re-deposited into the same or other eligible plan. This is a reportable transaction for an IRA owner and it must be completed within 60 days. There is a 1 per year limit regardless of how many IRAs you have.

This is a transfer of IRA funds that are sent, usually electronically, from an IRA and received directly by another IRA. Unlike a rollover, there is no limit to the number of trustee-to-trustee transfers each year.
 CONVERSION: A conversion is when a traditional IRA (or SEP or SIMPLE IRA) is changed into a Roth IRA. The character of the funds is changed and income taxes will become due on the converted amount in the year of the conversion.

The term recharacterization is used when referring to a traditional IRA that has been converted to a Roth IRA but the owner wants to “undo” the conversion. Recharacterization is also used to refer to a Roth IRA contribution that an owner wishes to change into a traditional IRA contribution. 

When an IRA owner converts a traditional IRA to a Roth IRA, then recharacterizes it to “undo” that conversion, but later decides that the conversion to a Roth IRA was a good idea after all, the traditional IRA is now going to be reconverted from a traditional IRA to a Roth IRA. *You cannot convert and reconvert during the same tax year or, if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion.