Conversion of Traditional IRA to Roth Steps.

[riskadverse]

I'm in the process of constructing a conversion of traditional IRA funds
and 401K rollover IRA funds to a Roth IRA account. I know this subject
has been touched upon a number of times here, but I am having trouble
finding a good collection of information using the search feature.

Can anyone point me to a thread or detail here the sequence of steps
involved in the process. My interest is in converting the maximum
amount I can at my existing tax bracket which should be considerably
lower than prior to my wife's and my retirement. I'm planning on
doing this year after year to try and reduce the funds in the
traditional IRA's. Any tips or tricks would be appreciated.


My guess is that I need to estimate our income for the year and run
it through a tax program (would I use last year's program?) and
then see how much more income I could add before the next tax bracket
kicked in. Other questions come to mind, such as can the conversion
take place up until April 15 of the next year similar to the
contribution deadline?

 

[Martha]

http://www.irs.gov/publications/p590/index.html is the IRS publication.

The best discussion and instructions I have seen is on the Fairmark site at http://www.fairmark.com/rothira/decide.htm

You need to do your conversion before year end. But, if you miscalculate, you can undo it (recharacterize) up until the time your return is due.

Nords and others are in the process of doing regular conversions and may have some tips.

 

[OAG]

Goto TAXACT.COM and download the FREE program. It is 2006 version and you can run though you projected income for 2006 on it.

 

[Martha]

Oh, and IRS form 8606 and instructions will be your friend.

http://www.irs.ustreas.gov/pub/irs-pdf/i8606.pdf
http://www.irs.ustreas.gov/pub/irs-pdf/f8606.pdf

 

[Nords]

Oh, and IRS form 8606 and instructions will be your friend.
http://www.irs.ustreas.gov/pub/irs-pdf/i8606.pdf
http://www.irs.ustreas.gov/pub/irs-pdf/f8606.pdf

What Martha said, and try these:

http://early-retirement.org/forums/index.php?topic=1978.msg31385#msg31385
http://early-retirement.org/forums/index.php?topic=9141.msg165818#msg165818

 

[REWahoo]

Here is an article with answers to commonly asked Roth IRA questions, including this one:

Q. If I convert my IRA to a Roth IRA, will that income increase my adjusted gross income for the current year?

A. Absolutely. The income you have to report for an IRA conversion to a Roth IRA will have an impact on all tax issues that are based on AGI -- except for any direct Roth contribution and/or conversion issues. In other words, if you meet the AGI limitation rules to convert or contribute to a Roth before taking the conversion income into consideration, this income won't make you ineligible based on an increased AGI. But any tax provisions that use AGI as a guidepost will be affected -- including medical expenses (7.5% AGI floor), miscellaneous deductions (2% AGI floor), taxability of Social Security (based on AGI), passive loss limitations (based on AGI), and many others.

If I understand this corrrectly, it looks like if your primary source of income is IRA withdrawals or other taxable income, the window of opportunity for Roth conversions could close at whatever time you decide to start taking SS...

 

[Nords]

If I understand this corrrectly, it looks like if your primary source of income is IRA withdrawals or other taxable income, the window of opportunity for Roth conversions could close at whatever time you decide to start taking SS...

Ooh yeah. It's that window that opens when your paychecks stop. It might even be a valid consideration for delaying SS.

We've also noticed that a Roth conversion can screw up a good college-aid FAFSA by driving AGI artificially high. The financial aid people just look at the AGI, not all the sophisticated tax planning that accounts for it. So we're going to skip a couple conversions in 2008 & 2009 to make sure that we don't mess anything up before the kid's 2010 matriculation.