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Convert to Roth? - 8/4/2009 10:53:22 PM
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davelinde
Posts: 475
Joined: 5/5/2006
From: New Jersey
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This idea just floated up this week and I wonder if anyone has done some analysis on this. We have a good size assortment of conventional IRA funds and it's possible we could convert them to Roth IRA's. Should we?
The conventional wisdom is that we should defer taxes as long as possible and use the untaxed funds held over time to maximize returns. When you also assume that income when you draw on the IRA will be low and the tax rate will also be low it seems a no-brainer. But now it seems almost a done deal that the country has borrowed so much money that the only place to attempt to repay it will be higher (maybe Euro-style silly high) taxes. So is it better to pay my taxes now and get it over with?
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RE: Convert to Roth? - 8/4/2009 11:44:34 PM
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blessedinnyc
Posts: 2902
Joined: 10/12/2007
From: NYC by way of Chicago
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quote:
ORIGINAL: davelinde
This idea just floated up this week and I wonder if anyone has done some analysis on this. We have a good size assortment of conventional IRA funds and it's possible we could convert them to Roth IRA's. Should we?
The conventional wisdom is that we should defer taxes as long as possible and use the untaxed funds held over time to maximize returns. When you also assume that income when you draw on the IRA will be low and the tax rate will also be low it seems a no-brainer. But now it seems almost a done deal that the country has borrowed so much money that the only place to attempt to repay it will be higher (maybe Euro-style silly high) taxes. So is it better to pay my taxes now and get it over with?
It doesn't matter when you convert to a Roth or take a distribution- what matters is just your tax rate when you do. This is assuming that you keep your investments the same.
If we assume that the tax schedule remains constant, you should try to convert in a low-income year. If you took a pay cut, missed a bonus, or were on furlough this year, it's probably a good move. But there's no rush- you can wait until your taxes are due in 2010 to do the conversion for 2009.
There's a lot of political wild-cards. They could raise taxes, or they could even charge an excise tax on Roth IRAs. If you plan on your Roth IRA being worth less than $500K inflation-adjusted when you hit 59.5, methinks you'll be safer from the threat of excise taxes than if you manage to save a great deal more.
< Message edited by blessedinnyc -- 8/4/2009 11:51:01 PM >
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RE: Convert to Roth? - 8/5/2009 10:37:14 AM
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NoShow
Posts: 386
Joined: 5/10/2005
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I think most people over emphasize the difference in tax rates, between working years and retirement years. Sure I personally "live" on income of a tax bracket lower than what I "make", but from all of the people I've talked to (i.e. helped with personal finance matters); the majority of people sound like they'll be in the same tax bracket upon retirement (i.e. their spending won't diminish much, therefore they'll need the same level of "income").
And if one considers the rising cost of so many things, it's very possible that any elimination of expenses (i.e. a mortgage or work expenses) can easily get replaced by new expenses (i.e. healthcare costs and or inflation on all other expenses).
That all said, yes I think it's worth taking a serious look at converting (at least some) for the sake of trading deferred taxes for taxes now and no taxes on future growth.
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RE: Convert to Roth? - 8/6/2009 11:50:48 AM
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APZR
Posts: 1052
Joined: 4/18/2005
From: GA
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If you convert, make sure it's a Trustee to Trustee conversion! DO NOT LET THEM SEND YOU A CHECK!! If they do send you a check, refuse it and tell them that they WILL do a Trustee to Trustee conversion. It requires more work on their end, but will save you a ton of tax problems and possible 40% of your money.
_____________________________
Ya can't keep trouble from visitin, but you don't have to offer it a chair.
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RE: Convert to Roth? - 8/6/2009 12:41:47 PM
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clydewolf
Posts: 43
Joined: 8/6/2009
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Davelinde,
You have been doing the right things to accumulate a sizable Traditional IRA. You have also received some good ideas from the above posters.
After 2010 when the "Bush Tax Cuts" expire, you will see a tax increase. No matter what tax bracket you are in the rates will increase, and some tax credits will be reduced.
If you otherwise qualify, I think you should convert to a ROTH IRA. To qualify to convert in 2009, your Modified Adjusted Gross Income must not exceed $100,000, and you can not file a Married Filing Separate tax retrun. These 2 restrictions will be eliminated after December 31, 2009.
Your MAGI does not include the conversion amount. It does take your AGI subtracts the conversion amount, and adds in the adjustments to income that you subtracted from your gross income to get to your Adjusted Gross Income.
The amount you should convert would be an amount to fill your tax bracket.
You should pay this additional tax for the conversion out of your savings or current income. Do not use the money from your TIRA to pay this income tax.
You must complete your ROTH IRA Conversion by December 31 to be claimed on your 2009 tax return. Then if you find the tax bill is too high or you do not qualify for a conversion, you can do a recharacterization of part or all of your conversion. You have until the due date plus extensions of your tax return to complete the recharacterization. That puts the date out to October 15, 2010 for a 2009 conversion.
You can do a ROTH Conversion at your present IRA custodian. This way there would be no trasnfer of your IRA money to another IRA custodian. In fact you would not have to change the investments.
In January 2010 you will receive a 1099-R showing the amount you removed from your TIRA. This will be reported on your 1040 line 15a and 15b. You will add a note there that this was a ROTH IRA Conversion.
You will need to complete IRS Form 8606, at least Part II, and if you have after tax contributions in your TIRA, you will need to complete Part I too.
Make your TIRA to ROTH IRA Conversion before December 31, 2009.
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RE: Convert to Roth? - 8/7/2009 9:36:37 AM
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blessedinnyc
Posts: 2902
Joined: 10/12/2007
From: NYC by way of Chicago
Status: offline
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quote:
ORIGINAL: clydewolf
Make your TIRA to ROTH IRA Conversion before December 31, 2009.
I think you can do contributions and conversions for tax year 2009 up until April 15th, 2010.
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RE: Convert to Roth? - 8/7/2009 10:10:52 AM
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metoo
Posts: 25
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quote:
ORIGINAL: blessedinnyc
quote:
ORIGINAL: clydewolf
Make your TIRA to ROTH IRA Conversion before December 31, 2009.
I think you can do contributions and conversions for tax year 2009 up until April 15th, 2010.
Clydewolf is right. Although he is a new member here I am familiar with him from another forum. He always gives excellent, accurate, Biblically based advice.
Roth contributions for 2009 can be made up until April 15, 2010. Roth conversions are taxed in the year they occur.
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RE: Convert to Roth? - 8/7/2009 10:28:02 AM
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blessedinnyc
Posts: 2902
Joined: 10/12/2007
From: NYC by way of Chicago
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quote:
ORIGINAL: metoo
Clydewolf is right. Although he is a new member here I am familiar with him from another forum. He always gives excellent, accurate, Biblically based advice.
Roth contributions for 2009 can be made up until April 15, 2010. Roth conversions are taxed in the year they occur.
Hmmm. Looks like you're right. That's an odd little quirk in the tax code; guess you learn something new every day. How are you supposed to figure out what your MAGI is before December 31st? Is the only option to guess and recharacterize if your MAGI goes over the limit for Roth IRA conversions?
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RE: Convert to Roth? - 8/7/2009 12:43:21 PM
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clydewolf
Posts: 43
Joined: 8/6/2009
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Blessedinnyc,
Yes, IRA Conversions to a ROTH IRA generally must be completed by the end of the year. The assets must be removed from the TIRA by December 31, but some exceptions allow the conversion to be completed in the following year.
Making a Conversion in 2009 you must estimate your MAGI. And when your estimate is low and in actuality you find your MAGI exceeds $100,000 you can not make a Conversion to a ROTH IRA. But if you have completed your Conversion and find you do not qualify for such action, you must do a Recharaterization. We have until the due date of our tax return plus extensions to complete the recharacterization. That puts the date at October 15.
Not making the Recharacterization results in a 6% penalty for each year the ROTH Conversion remains in the ROTH IRA.
Starting in 2010 the $100,000 MAGI is no longer a criteria for a ROTH Conversion. Also the Married filing separately is not a restriction for a ROTH Conversion.
There are other good reasons for doing a Recharacterization. An example would be: You made a ROTH Conversion of $10,000 in early 2008. Throughout the year you watched that ROTH IRA decrease in value. Leaving the ROTH IRA alone you will pay income tax on the $10,000 but it may have dipped to $7,000 by year end. Doing a recharacterization to put the $7,000 back to a TIRA would remove the tax bill. Doing the Recharacterization before December 31, 2008 would be the easiest. Doing the Recharacterization before April 15, 2009 would be the next best. And then waiting until before October 15, 2009 to Recharacterize and filing an ammended return gets the job done but is more effort.
The down side of the Recharacterization is the time restriction for your next Conversion is the longer of 30 days or next year.
The default tax method for ROTH IRA Conversions done in 2010 is to have the income tax paid 50% in 2011 and 50% in 2012. The tax payer can opt out of the default method and pay the tax in 2010. All of your ROTH IRA conversions in 2010 must use the same tax method.
A couple filing MFJ where each spouse has a ROTH IRA Conversion, one spouse can use the default method and the other spouse can opt out of the default method.
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