planning IRA to Roth IRA conversion in 2010?

[kaneohe]

smjsl.......here's something related to your question
Fairmark Forum :: Other Tax Questions :: TIRA converted to Roth IRA in 2009
(for all I know, might even be you). Looks like I overlooked one key point.......in the referenced thread, it sounded like you needed to have basis (from non-deductible TIRA) to be able to deduct loss. Another important point that needs researching is whether conversion to Roth constitutes the liquidation needed to take the loss deduction.
The linked thread suggests no but I'm pretty sure I saw something recently that said otherwise.....provided there was no TIRA left after conversion. Need further work on this point.

This might have been what I saw
http://www.edslott.com/forum/viewtopic.php?f=1&t=3628
see the comment by alan oniras

 

[smjsl]

Thanks kaneohe. The 2% AGI limit is too bad... If non-deducatable TIRA had gains, they would be taxed, but in case of loss, you don't get any credit for them due to the 2% of the AGI floor.

 

[tjhoo]

I'm thinking of rolling over all of our deductible IRAs into our business 401K plan this year. I've been doing that anyway just to consolidate the accounts and make them easier to manage.

Then the only IRAs we have left will be the non-deductible IRAs and I'll convert those to Roths.

If anyone sees any flaws in this plan, I'd appreciate any comments.

Sounds like what we are in the midst of doing...Good luck...

 

[Finance Dave]

You can't deduct losses in an IRA because you are not the reporting gains,
that would be having your cake and eat it too.
You can undo it and then contribute the full amount again, but I don't think it's worth it.
TJ

Ok, now I'm more confused, but that's probably my own fault.

If I cashed out just MY IRA (not my wife's also), I would report the gain, right? I'm just wondering if I can net the losses on one with the gains on the other.

Let me ask it a different way...if you convert a TIRA to a Roth in 2010 and there are gains, do you report them at time of conversion, or when you eventually withdraw the money? If it's upon eventual withdrawal from the Roth, then that's fine too.

 

[Finance Dave]

Dave, does that mean you have no more TIRAs (deductible or non-deductible) after the conversion? I'm kind of new to this loss thing but what I've read suggests that you can get credit for the loss as a misc deduction subject to a 2% of AGI floor so if you have a high income, you probably won't get anything back for the loss.

Correct, I would have no more TIRAs afterwards. Our income is pretty high.

One thing maybe folks can clarify...do you add back 401k contributions to get to AGI for that purpose? In other words, assume we make $180k gross, but contribute $32k to 401k pre-tax....is our AGI then $148k?

I get confused between AGI and MAGI....maybe someone can clarify.

Thanks,

Dave

 

[Khan]

Ok, now I'm more confused, but that's probably my own fault.

If I cashed out just MY IRA (not my wife's also), I would report the gain, right? I'm just wondering if I can net the losses on one with the gains on the other.

There is no 'gain' in an IRA. What is withdrawn (or converted) from a TIRA is taxed as income.

Let me ask it a different way...if you convert a TIRA to a Roth in 2010 and there are gains, do you report them at time of conversion, or when you eventually withdraw the money? If it's upon eventual withdrawal from the Roth, then that's fine too.

Withdrawals from a Roth are not taxed.

 

[friar1610]

I still can't figure out if it's worth doing in my case.

My wife and I each have a Rollover IRA with our 401K/403B proceeds in them. (Most of my working life was as an active duty military guy before the days when military people could participate in TSPs and similar programs. My wife didn't work that many years and when she did she had a modest income. Nevertheless, we put as much as we were legally able to into our 401Ks/403B's.) In addition, I made after tax contributions during some years.

If we were to convert everything in one fell swoop it would kick us out of the 25% bracket and cost us $70K in federal taxes - a non-starter. So, I am looking at using the "headroom" within our tax bracket to convert some each year. But, at age 64/62, we wonder if it's really worth the hassle.

Any opinions/suggestions welcomed.

 

[Finance Dave]

There is no 'gain' in an IRA. What is withdrawn (or converted) from a TIRA is taxed as income.



Withdrawals from a Roth are not taxed.

Thanks Khan, starting to see it now. I'm confusing gains with income...and using the wrong words. I'm trying to minimize my "income" upon the conversion by netting two accounts.

 

[kaneohe]

One thing maybe folks can clarify...do you add back 401k contributions to get to AGI for that purpose? In other words, assume we make $180k gross, but contribute $32k to 401k pre-tax....is our AGI then $148k?

I get confused between AGI and MAGI....maybe someone can clarify.

Dave

Dave.....see the worksheet on p. 62. I think in your example your "gross" income is 180K.....the number you would brag about on the street or in a bar. Your federally reported gross income for tax purposes is 148K (your salary was reduced). Your AGI is also 148K as is your MAGI. You should double check on the worksheet to be sure. Interesting that if you deducted 10K for an IRA contribution to get new AGI of 138K, you'd have to add it back to get MAGI of 148K but you don't do that w/ the 401K contribution.
http://www.irs.gov/pub/irs-pdf/p590.pdf

 

[kaneohe]

If I cashed out just MY IRA (not my wife's also), I would report the gain, right? I'm just wondering if I can net the losses on one with the gains on the other.

Dave,

Since you have non-deductible IRAs (that's all you have , right?), you would report the gains/earnings or whatever you wish to call them over your basis
(non-zero since the IRA was non-deductible) if you cashed them out or if you converted to a Roth. You can't net the losses directly against the gains since they (losses) need to be reported on Sch A as a misc deduction subject to a 2% of AGI floor. You can't take the loss unless you have basis in the IRA and you have disposed of ALL of your TIRAs (or Roths) Deducting Losses on Your IRA Investments
Since your AGI is so high it is likely that you won't be able to deduct the loss at all since the 2% of AGI likely exceeds the loss.

 

[kaneohe]

I still can't figure out if it's worth doing in my case.

My wife and I each have a Rollover IRA with our 401K/403B proceeds in them. (Most of my working life was as an active duty military guy before the days when military people could participate in TSPs and similar programs. My wife didn't work that many years and when she did she had a modest income. Nevertheless, we put as much as we were legally able to into our 401Ks/403B's.) In addition, I made after tax contributions during some years.

If we were to convert everything in one fell swoop it would kick us out of the 25% bracket and cost us $70K in federal taxes - a non-starter. So, I am looking at using the "headroom" within our tax bracket to convert some each year. But, at age 64/62, we wonder if it's really worth the hassle.

Any opinions/suggestions welcomed.

different bracket, same issue
Fairmark Forum :: Retirement Savings and Benefits :: Should I convert some Trad. IRA to Roth or not

just found this....probably more than you'll ever want to know but seems useful
https://www.bernstein.com/CmsObjectPC/pdfs/B65853_RothToRiches_WP.pdf

 

[teejayevans]

I get confused between AGI and MAGI....maybe someone can clarify.

For most people they are the same, MAGI is just AGI with some
deductions added back in.
TJ

 

[haha]

If we were to convert everything in one fell swoop it would kick us out of the 25% bracket and cost us $70K in federal taxes - a non-starter. So, I am looking at using the "headroom" within our tax bracket to convert some each year. But, at age 64/62, we wonder if it's really worth the hassle.

Any opinions/suggestions welcomed.

Since there is almost no hassle it seems like a good idea to me. I am doing what you propose, starting this year. It would have optimal to begin earlier, but I didn't want the extra income on my 1040. My goal is not necessarily to convert it all, but to knock it down. In talking to my broker, I realize that the really dynamic feature of these conversions is when you can do some when markets are way down. I wish I had been attuned to this last March. So my 2009 conversion is cash. In 2010, if there is a smackdown, I will convert stock of a well financed company with some volatility. If it continues downward, there is always recharacterization.

Ha

 

[Gotadimple]

See the link to the 12/23 article from the WSJ why-it-may-pay-to-convert-to-a-roth-ira: Personal Finance News from Yahoo! Finance

Interesting point about the impact of taxes, especially to partial conversions. There is a table in the article from TR Price. I'm not sure I understand the table, specifically in the example of using taxable funds to pay taxes on the conversion.

-- Rita

 

[harley]

I just did my conversion for 2009, since by a financial fluke (I hope it's a fluke ) I'm only in the middle of the 15% bracket this year. In my case it's a straight converstion from a tIRA. I don't have any non-deductible money in my IRAs. I retired before anybody turned me on to that strategy.

It was a really simple process, and Vanguard was totally diligent about making sure I understand the tax and income implications. Not sure how difficult it would be to recharacterize, but I think if you held on to all the appropriate paperwork it wouldn't be too hard.

 

[Gotadimple]

Not sure how difficult it would be to recharacterize, but I think if you held on to all the appropriate paperwork it wouldn't be too hard.

Harley,
You're right it's not that difficult, however, it is a small hassle.

You have to contact the IRA Administrator and tell them what you want to re-characterize. They need to figure out what the earnings are on the amount to be re-characterized and issue the IRS paperwork, which you then use to complete or amend a tax return. And, you need to do it within the IRS timeline, to avoid penalties.

-- Rita

 

[oma]

Curious if any of you use/go to tax advisors for these types of conversions. I usually use some basic tax program each year (HR Block) but it appears that you have to have specialize tax knowledge to complete these types of conversions.

 

[Gotadimple]

Actually you don't need anything but a basic tax program to complete the entries on the IRS forms and calculate the taxes.

The question to consider in these conversions are: (1) do I convert the entire thing, or (2) do I convert a part of the account?

IRS form 8606 is the one you want to look at to follow the calculations, or, test it out in your HRBlock software.

-- Rita

 

[Matt in OH]

Dave,

I don't think you can net them, so you would have to pay tax on your entire $4k gain. This isn't a bad deal though. You pay tax on $4K and convert to Roth then accumulates tax-free for the rest of your life and the beneficiaries life.

To claim the loss on your wife's IRA you would have to sell the assets in the IRA and at only a $500 loss it isn't worth it as to be deductible any way it is an itemized deduction subject to 2% limitation.

I would just convert them both and pay the tax.

Keep in mind, if your income is currently too high to fund Roth IRA's you could continue to fund nondeductible IRA's even after the conversion and then convert them annually to Roth IRA's. This basically removes the income limitation for you as long as you don't also have other taxable IRA assets.

Please note you didn't mention if you have other taxable IRA's other than your nondeductible IRA, if you do whenever you convert an IRA to a Roth the conversion most of the conversion would be taxable only the portion of the conversion pro ratably allocable to the nondeductible basis would be tax-free.

 

[aaronc879]

I have a rollover IRA that I would really like to put into my ROTH at Vanguard. Do I just call Vanguard and give them the account number from the other company and they take it from there? Come tax time, are there extra forms I have to fill out or do I just put in the amount on line 11 of my 1040A form? If all I have to do is make a call to Vanguard and then fill in 1 extra line on my tax form then i'll definitly do it. I can do half in 2010 and half in 2011 and still stay in my normal tax bracket

 

[teejayevans]

I have a rollover IRA that I would really like to put into my ROTH at Vanguard. Do I just call Vanguard and give them the account number from the other company and they take it from there? Come tax time, are there extra forms I have to fill out or do I just put in the amount on line 11 of my 1040A form? If all I have to do is make a call to Vanguard and then fill in 1 extra line on my tax form then i'll definitly do it. I can do half in 2010 and half in 2011 and still stay in my normal tax bracket

I would (to keep things simple) call them to open a regular IRA (it will be empty but VG will give you an account #), you give this acct # to the other company (they will have a "rollover" form), after that is successful, then rollover part of your IRA->Roth. Otherwise you have to give 2 acct #s to the other company who is losing its motivation help you, I foresee problems...
TJ

 

[kaneohe]

I have a rollover IRA that I would really like to put into my ROTH at Vanguard. ... Come tax time, are there extra forms I have to fill out or do I just put in the amount on line 11 of my 1040A form?

If you ever made a non-deductible contribution in the past, you should fill out 8606 also. If not, use the 2 places on that line on 1040A.

 

[Finance Dave]

Dave,

Since you have non-deductible IRAs (that's all you have , right?), you would report the gains/earnings or whatever you wish to call them over your basis
(non-zero since the IRA was non-deductible) if you cashed them out or if you converted to a Roth. You can't net the losses directly against the gains since they (losses) need to be reported on Sch A as a misc deduction subject to a 2% of AGI floor. You can't take the loss unless you have basis in the IRA and you have disposed of ALL of your TIRAs (or Roths) Deducting Losses on Your IRA Investments
Since your AGI is so high it is likely that you won't be able to deduct the loss at all since the 2% of AGI likely exceeds the loss.

Ok, this is helpful, thank you kaneohe.

To answer your question, "YES", all we have is non-deductibles...NONE of the money in either account was tax-deductible due to our high incomes.

It looks like I should convert mine this year for sure (I am assuming the market will go up, and therefore converting this year makes my gain smaller...as a matter of fact I should convert NOW since I calculate the gain based on the date of the conversion...not the end of the tax year). As for my wife's account...I could wait until it increases, or I could convert now, really doesn't matter...so long as I don't let it appreciate too much to where I will show a gain and then be taxed on it.

You are right that any loss would be so small I'd never reach the 2% limit.

I'll keep reading, but it looks like I should convert both ASAP, pay the taxes on my gain (the gain is only about $4k, so the tax bill is not outrageous), and then enjoy tax free distributions later.

My plan for every year from now until rehirement is to fund a non-deductible TIRA for both wife and I, and immediately convert to a Roth...thus essentially building our tax-free portion of our portfolio.

 

[Finance Dave]

Dave,

I don't think you can net them, so you would have to pay tax on your entire $4k gain. This isn't a bad deal though. You pay tax on $4K and convert to Roth then accumulates tax-free for the rest of your life and the beneficiaries life.

To claim the loss on your wife's IRA you would have to sell the assets in the IRA and at only a $500 loss it isn't worth it as to be deductible any way it is an itemized deduction subject to 2% limitation.

I would just convert them both and pay the tax.

Keep in mind, if your income is currently too high to fund Roth IRA's you could continue to fund nondeductible IRA's even after the conversion and then convert them annually to Roth IRA's. This basically removes the income limitation for you as long as you don't also have other taxable IRA assets.

Please note you didn't mention if you have other taxable IRA's other than your nondeductible IRA, if you do whenever you convert an IRA to a Roth the conversion most of the conversion would be taxable only the portion of the conversion pro ratably allocable to the nondeductible basis would be tax-free.

Great timing Matt....I posted my prior comment before reading your response, and we're on the same page.

I do not have any taxable IRAs. I used to, but years ago I converted them to Roths and they've been in the Roths ever since. I wish I would have had the Roth more available to me, but unfortunately it was introduced later in my working life, and the income restrictions kept me from participating much of the time. I only have about $80k in Roths today, and after my additional conversion being discussed here it will be about $100k....not as much as I'd like to have.

Wife and I have about 5 more years of *ork, so maybe we can get that to $200k through combination of contributions (both regular and catch-up) and growth. After that, it will be time to wave to my boss politely and drive off (rather than sail off...I'm a car guy not a boat guy) into the sunset.

Now, if I can just find a low-cost producer of suntan lotion.

 

[harley]

Great timing Matt....I posted my prior comment before reading your response, and we're on the same page.

I do not have any taxable IRAs. I used to, but years ago I converted them to Roths and they've been in the Roths ever since. I wish I would have had the Roth more available to me, but unfortunately it was introduced later in my working life, and the income restrictions kept me from participating much of the time. I only have about $80k in Roths today, and after my additional conversion being discussed here it will be about $100k....not as much as I'd like to have.

Wife and I have about 5 more years of *ork, so maybe we can get that to $200k through combination of contributions (both regular and catch-up) and growth. After that, it will be time to wave to my boss politely and drive off (rather than sail off...I'm a car guy not a boat guy) into the sunset.

Now, if I can just find a low-cost producer of suntan lotion.

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