Roth IRA Conversions and Re-Characterizations

Question: Dear Mr. Long, I enjoyed you video on the Lifestyles Unlimited website about IRAs.  I am new to Lifestyles here in Dallas and have a question for you if you have time. (I’m 61.)

In your video, “The top 10 things you need to know about Self-Directed IRAs”, you mentioned that a 401k can be rolled over into a Roth IRA and you pay taxes on that rollover.   The Roth IRA can then be used to make a profit from Real Estate (no debt financing).

If I understood you correctly, you then have till Oct 15th to change you mind and put the Roth IRA money back into your 401K and presumably not pay have to pay the taxes incurred from the initial rollover.   (same calendar year)

My question: Can the profit that was incurred within the Roth IRA remain in the Roth IRA while the initial rollover amount is returned to the original 401k?
If this happened, I am assuming the tax liability would be zero or minimal?

Question 2:  My company now offers a Roth 401k.  Can a Roth401k be used like a Roth IRA or must the Roth 401k be converted to the Roth IRA?

Question 3: Do you have an office in the DFW area?

Thank you for your time.

Answer: Yes, it’s true that you have until October 15 of the following year to recharacterize, or “unconvert” to use a more colloquial but not technically correct name.  If you do, then there are no tax implications for the initial conversion.

 Unfortunately, the answer to your first question is no, you cannot leave the profit in the Roth IRA.  Boy, that would be a neat trick, but it just isn’t so!  Also, when you recharacterized it would go back into a traditional IRA, not back into the 401(k).

 On your second question, assuming you mean to ask whether or not you can self-direct your Roth 401(k), the answer is no, unless it is an individual 401(k) plan like what is offered at Entrust.  The company controls what you can do as long as it is there.  When you separate from service you can always roll the Roth 401(k) into a Roth IRA and self-direct it, but you generally cannot access the funds until you leave employment or have another distributable event.  Depending on your situation, it may be an excellent idea to participate in your company’s Roth 401(k) just to build up Roth funds for when you do finally retire.

 Yes, we do have a DFW office just north of downtown Dallas.  Mr. Ryan Kimura runs that office, and I have copied him on this email.

 I’m sure you and Mr. Kimura can get together soon.  We have a “Fright Night” event coming up in Dallas which might be fun to attend.  Have a great day!

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