Roth Conversion

[sarahsays]

I'm interested in converting part of my rollover IRA to my Roth, but I can't find anything that says whether this affects my contribution limits for 2008. I assume that the conversion wouldn't affect my $5000 contribution amount since the money was already contributed to a 401(k). Am I right?
Forgive, I'm still new at this.

 

[ziggy29]

Roth conversions do not count toward your contribution limits. Conversions and contributions are considered as different activities.

Oh, and welcome!

 

[sarahsays]

Thanks! That's what I assumed, but wanted to double-check.

Also, I probably can't afford to convert the whole account ($16,000+) at once and pay taxes out of pocket. Would it be best to do it in thirds now or wait until 2010 so I can spread the taxes of 2011 and 2012?

 

[ziggy29]

Thanks! That's what I assumed, but wanted to double-check.

Also, I probably can't afford to convert the whole account ($16,000+) at once and pay taxes out of pocket. Would it be best to do it in thirds now or wait until 2010 so I can spread the taxes of 2011 and 2012?

It might not be a bad idea to wait unless you'd be in a higher tax bracket in 2010 than you are today.

There is some political risk to waiting, though, as we never know if a new president and new Congress in 2009 will decide to repeal this legislation.

If we could be sure the current plans for 2010 conversion remain in place, it might be better to wait, but there is something to be said for a bird in the hand rather than hoping for the two in the bush.

I'd probably convert as much as I could afford to pay taxes on this year (assuming it didn't kick you into a higher tax bracket). Keep in mind that you have a lot of time to crank up withholding for the rest of the year. If you convert $4000 in the 25% federal tax bracket, you could adjust withholding to take an extra $1000 if that makes it easier on your pocketbook.

 

[lucija]

Keep in mind that although conversion $ do not count as contributions, they will increase your AGI, which may or may not place you above the the AGI conversion limit ($100K, I think).

...Also, I probably can't afford to convert the whole account ($16,000+) at once and pay taxes out of pocket. Would it be best to do it in thirds now or wait until 2010 so I can spread the taxes of 2011 and 2012?

Either way would work. However, keep in mind that some of the tax breaks are scheduled to sunset with 2010 (again, I think), so you may find yourself being taxed more (percentage wise) in 2011 & 2012 on the same $ amount .

 

[sarahsays]

Thanks for the help. My AGI isn't really an issue, only make around 50k. I think I will convert a portion this year and see where I stand next year. Maybe I'll decide to wait at that point...

 

[kaneohe]

Keep in mind that although conversion $ do not count as contributions, they will increase your AGI, which may or may not place you above the the AGI conversion limit ($100K, I think)
.

I believe that it is a MAGI conversion limit of $100K (not AGI).
MAGI for Roth conversion purposes is AGI less conversion income +/-
a number of other factors so the conversion $ do not affect your ability to
do the Roth conversion. (ref: p125 Pub. 17).

 

[meridiver]

I believe that it is a MAGI conversion limit of $100K (not AGI).MAGI for Roth conversion purposes is AGI less conversion income +/- a number of other factors so the conversion $ do not affect your ability to do the Roth conversion. (ref: p125 Pub. 17).

I believe this is correct. As long as your AGI without including the conversion amount is under 100K, you can convert as much as you want - you don't have to worry about whether you've gone over $100K once you add in the converted amount. I believe the same principle holds for calculating your IRA income limit for current year contributions.

 

[lucija]

meridiver & kaneohe -- Thanks for the correction! I learn something new every day!

 

[Sarah in SC]

Hi Sarah and glad you're here--I am often quoted as "Sarah says" and think it is way cool that is your handle! Sunny southern welcome from Sarah in SC!
I debate doing the conversion, but something makes me want to keep both a traditional and Roth IRA in the mix. Maybe it is a fear that one day the feds will take away (in some fashion) the tax-free aspect of the Roth. I contribute to a Roth, but have not converted any of my traditional IRA funds.

 

[virginia]

Does anyone know- after you convert, must that money be kept separate? I had an IRA in the Janus Contrarian Mutual Fund that I just converted into my Roth. Can I dump the money into my Roth Janus Contrarian Fund that I already had, or does it have to be kept separate?

 

[ziggy29]

Does anyone know- after you convert, must that money be kept separate? I had an IRA in the Janus Contrarian Mutual Fund that I just converted into my Roth. Can I dump the money into my Roth Janus Contrarian Fund that I already had, or does it have to be kept separate?

Once you convert and pay the taxes, a Roth is a Roth is a Roth, and you can commingle funds as you please.

 

[virginia]

Thanks Ziggy-

 

[armor99]

Hmmm... It looks as if I have overlooked this thread for a while. I too was thinking of converting an old company 401k into a Roth. I understand that it must be converted into a trad. IRA and then converted into a ROTH. At that time, I must pay taxes on all of the funds converted over. But here is what I was unsure of. Is there any rule that says I must convert it all at once? Or am I allowed to move over a little bit every year to avoid the massive tax penalty? Thanks....

 

[KB]

Here is a link that was posted here a year or so ago. It has lots of info on Roth IRA conversions.

Guide to Roth IRA Conversions

 

[jIMOh]

Thanks for the help. My AGI isn't really an issue, only make around 50k. I think I will convert a portion this year and see where I stand next year. Maybe I'll decide to wait at that point...

What is your taxable income? 50k is gross, then there is AGI, then there is taxable income. If you can get taxable income into 15% tax bracket, I would convert to cap the 15% bracket limit.

For single filers, 15% bracket is capped at $32550.
Reference Room

Meaning if your deductions take taxable income under 32550, then convert the difference between taxable income and the $32550 cap.

If you do this, you are paying 15% taxes and not 25% taxes.