Roth Conversions

[padthaiforlunch]

2010 is going to be the big year for Roth Conversions, so I thought you guys might want a some tips.

The key features of the for 2010 are twofold:

1. The income limits are lifted for conversion.
2. The client can take two years to pay the taxes.

BEWARE: The client is subject to tax and penalties if they take a distribution from the Roth account within five years from conversion, or last contribution.

If the client cannot wait five years, then they may not be a good fit for conversion.

For 2009, clients may be eligible for a tax credit of up to $1,000 ($2,000 for marrieds) for contributions to traditional and Roth IRA's. This credit can reduce the tax bill dollar-for dollar, so contribute $1k to a Roth and reduce your tax bill by $1k.

To get this credit, clients must have an MAGI of less than $55,500 for married and $26,500 for single.

Keep in mind that MAGI is after deductions and credits.
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Key feature of Roth IRA

- Grows tax-free
- Tax-free distributions
- No RMD
- Eligible for "stretching." Heirs must take RMD.
- Distributions not counted in determining taxable amount of Social Security benefits

 

[Mr. Bill]

Thank you for posting that!

 

[annuityseller]

correct me if I'm wrong but in the 5 year rule they can take out the pric. w/out penalty but not any growth in the 5 year time frame?? of cource they have to be over 59.5 years old

 

[briko3]

You can withdraw principle from a Roth. The think I haven't heard is this tax credit. You mean that if someone puts $1000 in, they get $1000 back at tax time? Do you have a link to more detailed information?

Thanks!

 

[padthaiforlunch]

correct me if I'm wrong but in the 5 year rule they can take out the princ. w/out penalty but not any growth in the 5 year time frame?? of course they have to be over 59.5 years old

If they are 59 1/2 (or disabled or first time home buyer/re-builder or dead) they do not have the 10% penalty, in addition the contribution/conversion must be in the account five years or more.

Distributions are based on FIFO -- first in, first out. So if the client had $50k in the Roth from 5 years ago and then converted $100k, the client can access $50k on a qualified basis, and not have it counted as income, thus avoiding tax. After 5 year, the client can access the $100k on a qualified basis.
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You can withdraw principle from a Roth. The think I haven't heard is this tax credit. You mean that if someone puts $1000 in, they get $1000 back at tax time? Do you have a link to more detailed information?

Thanks!

This is the Retirement Savings Contribution Credit. Page 81 of the pdf:

http://www.irs.gov/pub/irs-pdf/p590.pdf

 

[dgoldenz]

If they are 59 1/2 (or disabled or first time home buyer/re-builder or dead) they do not have the 10% penalty, in addition the contribution/conversion must be in the account five years or more.

Distributions are based on FIFO -- first in, first out. So if the client had $50k in the Roth from 5 years ago and then converted $100k, the client can access $50k on a qualified basis, and not have it counted as income, thus avoiding tax. After 5 year, the client can access the $100k on a qualified basis.
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This is the Retirement Savings Contribution Credit. Page 81 of the pdf:

http://www.irs.gov/pub/irs-pdf/p590.pdf

The PDF file mentions a credit rate of 10-50%. Wouldn't you have to put in $2000 to get a $1000 tax credit?

 

[padthaiforlunch]

Yes, you are correct. The most an individual can receive is $1k in credit for a $2k contribution. Got ahead of myself while typing.

Still nice for those who qualify. A tax credit for contributing to a Roth -- government bail-out for the middle-class.

 

[mmov1997]

FYI - Any distributions taken with 2 years of conversion make the 2 year "tax payment deferral" option null and void and the IRS accelerates the tax due.

 

[TristanTLC]

so my situation is this: I have a 64/F who got layed off from her work. She will be on Medicare in one year. She has a 401K that she wishes to convert. She wishes to start getting her dividends upon turning 65.

1) Should she convert at all?

2) If she converts and starts to receive benefits at 65, she would no longer get the tax deferral benefits?

Please advise.

 

[padthaiforlunch]

If she wants to start spending the money from her 401(k) starting next year then she should not convert it all. If she converts part of it, she should only convert up to an amount she can leave for five years.

PM me if you would like to discuss conversion strategies.

so my situation is this: I have a 64/F who got layed off from her work. She will be on Medicare in one year. She has a 401K that she wishes to convert. She wishes to start getting her dividends upon turning 65.

1) Should she convert at all?

2) If she converts and starts to receive benefits at 65, she would no longer get the tax deferral benefits?

Please advise.