IRA rollover strategy gives you more control

October 12, 2012|By Janet Kidd Stewart

Q. I have a pension fund that must be rolled over from my company. This fund has mostly pre-tax money and a little after-tax money that I contributed through the years. I know that I have to roll over the pre-tax pension money to a traditional IRA or 401K. Can I roll over this money (along with its accrued gains) into a Roth? If I decided to just have the after-tax money deposited in my checking account (minus the gains), could I have the gains on this after-tax money put into the rollover IRA so I wouldn't have to pay tax on it until I start taking distributions?

— M.M.

A. You can roll a workplace account into a Roth IRA, and you will have to include it in your gross income for that year, according to IRS Publication 575. But you don't include in income contributions to the account that were already taxable to you. Depending on your situation, it might be advantageous to roll the plan into a traditional IRA, keeping track of which portion is after-tax contributions, said Ed Slott, an accountant and an author on myriad IRA topics.

This strategy allows you to keep more control over how much tax you'll need to pay in any given year, Slott said, so you can gradually convert to the Roth IRA according to what's best for your situation. When you do convert, remember the rollover will be subject to the pro-rata rule, meaning that distributions are taxed according to the proportion of taxable versus non-taxable funds in all your IRAs.

Q. I am a recent retiree who lost my husband in May 2011. Several years before his death he co-signed a personal student loan for his grandson. My step-grandson is in no position to repay the loan and quite frankly neither am I, but I have been paying the $50 each month toward an approximate $6,000 loan (the balance is now down in the $5,000 range). Am I legally responsible to repay this loan?

— E.A.

A. Most likely you aren't responsible for the debt, but it depends on a number of factors, said Nicole Livingston, an estate-planning attorney with SinclairProsser Law LLC in Annapolis, Md. The fact that you have initiated payments is a complicating factor, as is whether the creditor filed a claim against your husband's estate and whether his assets went through probate, Livingston said. Contact an experienced attorney who can go through each of these factors and others, she said.

Q. Can you roll over a pension plan into real estate, such as buying a home without paying a penalty or additional taxes? We are residents of Wisconsin; my husband is 60.

— V.B.

A. You can roll an employer plan into a self-directed IRA that can purchase real estate, but there are a number of restrictions on these investments, including a prohibition on buying property that you live in yourself, Slott said.

Q. I am 62, just retired, and am participating in the Maryland Health Insurance Plan. MHIP bases my health insurance premiums on income. I could no longer afford my home and sold it and purchased a cheaper home and have some money left. Can MHIP consider the left over money as income? I've asked three different lawyers and my tax guy and I cannot get a definite answer.

— B.H.

A. Yes it can, according to Tate Showers, interim executive director for the Maryland Health Insurance Plan.

"We look at line 22 of federal 1040 form" for the amount of income to be considered for subsidies, Showers said.

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