Comments on: Look Before You Leap: Roth IRA Conversions in 2010

By: Jeff

Jeff — Mon, 16 Nov 2009 00:37:19 +0000

When calculating the total value of all “Traditional IRAs” in order to determine what percentage of the Roth conversion is taxed, does it include both spouses’ IRAs? In other words, if I am the only one to convert an IRA to a Roth, do my wife’s IRAs come into the mix?

By: jerry

jerry — Tue, 03 Nov 2009 17:04:30 +0000

I am retired and understand Roth IRA except for
5 year rule and withdrawals during the five
year period. Question is: can I withdraw my
principal without penalty if I need the money
since I already will have paid the tax on it?
I am talking about conversion to Roth IRA in
January 2010.

By: Jim

Jim — Fri, 30 Oct 2009 20:01:27 +0000

If in the past year your 401K got clobbered by the market, would it be a good time to convert your Traditional IRA to a ROTH IRA since your ‘gains’ have effectively been reduced and therefore you tax bill would be less? Then, after the transfer, you could try to grow it back in a tax free ROTH IRA in the coming years?

By: Chuck

Chuck — Thu, 03 Sep 2009 22:52:02 +0000

I would like to take issue with your statement, “(remember, if you’re over the Roth contribution limit, then you’re over the Traditional IRA deductibility limit)”. I have a number of friends who earn in excess of $250k per year, can’t fund a Roth, but take a 100% deduction for their $6,000 annual contribution (we’re all over 50) to their traditional IRA. The only time that an individual’s earnings affect the deductibility of his contribution is if that person is covered under an employer’s qualified plan.

By: Britt (Your Roth IRA)

Britt (Your Roth IRA) — Mon, 20 Jul 2009 19:26:25 +0000

Well-made point. Most people fail to realize that you can’t have multiple IRAs. You can have multiple IRA accounts with various financial institutions. But in the eyes of the IRS, an individual can only have one (1) IRA. So whenever you calculate the basis of your contributions and earnings in order to make a withdrawal or a conversion, you need to pool your IRA funds from every account designated as an “IRA.”

You’re right when you state that the “fund a Traditional IRA, then convert to a Roth” solution is only a simple one if you’re starting from a clean slate. Unfortunately, most high income retirement plan participants are in their 50’s and 60’s, so they probably have an IRA already.

So what’s the lesson here?

Always look before you leap.

If you’re uncertain of the impact your actions will have, either consult a professional advisor who is sure, or don’t mess with anything. Trying to save a few pennies while armed with half the information you need is likely to cost you more than you’ll ever save!

By: mram

mram — Sun, 03 Feb 2008 07:01:29 +0000

I think the workaround may not be work on employer plan begining tax year 2008. In 2008 you are allowed to convert from 401(k) to Roth IRA. My assumption is that the IRS 8606 form will be updated to reflect 401(k) in addition to the traditional IRA, SEP-IRA and SIMPLE IRA in calculating your basis percentage.

We will wait and see in 2010.

By: nickel

nickel — Sat, 02 Feb 2008 14:07:53 +0000

LivingAlmostLarge: I’d wait until 2010 to make a decision like this. Who knows what tax changes could be in place by then? For all we know, the AMT won’t be around any longer.

By: livingalmostlarge

livingalmostlarge — Fri, 01 Feb 2008 14:46:12 +0000

We have about $40k in DH’s old 401k and we’ve left it alone for now. We were considering rolling it in 2010 into his Roth IRA when the income ceiling is lifted. But the more we think about it, the more we think it’s a bad idea.

We’ll likely be 28-33% tax bracket and if we don’t have kids could we be hit with AMT? And if we do we also could be hit with AMT right?

So I’m not sure it makes sense to convert because we’ll have to pay state taxes on top of that, so will we likely be in a lower bracket during retirement?

Would you do it?

By: C Thomas

C Thomas — Mon, 14 Jan 2008 17:40:02 +0000

> Moving it to a Solo 401k, doesn’t solve any issues since it will still be taxed at the end, like Trad. IRA.

Randall you don’t understand. My current Traditional IRA contributuions are not deductable from income. The T-IRA account will accum earnings tax deferred, taxes are paid when withdrawn.

If I can roll that T-IRA into a Roth the earnings will be tax FREE. That will help build a more tax diversified portfolio. So if taxe rates are high I would withdraw tax-free money.

I too have a SEP-IRA that dwarfs my non-deductable IRA so a conversion to Roth that require prorating in the SEP would be 95% taxable. I don’t want to pay more taxes now.

I made a “calendar todo” to check into this at the end of 2009. I probably will setup a SoloDB this year. That means no more SEP, but I can have a Solo 401(k).

Where this logic does work is if you currently have a 401(k) from a former employer as my wife does. We are waiting to 2011 to roll that to an IRA so that her current T-IRA loaded with non-deductable contributions can be rolled to a Roth.

By: Joel

Joel — Thu, 18 Oct 2007 15:54:04 +0000

With a Democratic Congress likely in power at least through 2010, and a Democratic President likely in 2008, I would not count on this tax “break” being available when it’s scheduled to be. By then there will likely be a permanent fix to the AMT, and there’s little question that closing this loophole would be part of that process. Very unfortunate. I’d be careful with banking on having this available.

By: Randall

Randall — Thu, 18 Oct 2007 14:56:02 +0000

This is an understandable issue because all the sources of rollover money you listed are ‘pre-tax contribution’ sources. 401k and Traditional IRAs both don’t have tax taken out until funds are disbursed (retirement). To do the rollover to a fund that NEVER has taxes taken out, means the government is going to require those taxes up front. Either way you pay taxes on the money.

The benefit for the Roth IRA (and Roth 401k also) is the belief that not having to pay taxes in the future is better than not paying taxes now. Whole ‘nother discussion I won’t go into here.

Moving it to a Solo 401k, doesn’t solve any issues since it will still be taxed at the end, like Trad. IRA.

One workaround is to break up the rollover over a number of years, rather than taking a big tax hit all in one year. But YMMV on this. If you believe it’s better to get taxes out of the way, this probably wouldn’t be too attractive an idea.

By: jim

jim — Thu, 18 Oct 2007 14:44:56 +0000

dammit… this sucks, at least you dug it up and we learned about it beforehand