NOL to shelter Roth Conversion
1. Any suggestions on how to be certain we optimize the use of NOL (Net Operating Loss) Carryover to offset the taxable income of a Roth Conversion ?
2. Are there any unique, easily overlooked issues to watch out for, including, eg, unusual AMT complications.
3. To be certain NOL is not lost if hit by the proverbial bus, it appears to make sense to use NOL to offset a 100K+ conversion (parts of which, being in separate Roth conversion accounts, can of course be re-characterized within the applicable timeframe).
Does anyone sense or have the experience (even if just from use of significant NOL in other taxable offsets) that the IRS would more aggressively scrutinize a significant conversion sheltered by NOL carryover. We’re naturally certain that everything can be totally documented
and would withstand any overly zealous scrutiny, but of course no one wants the aggravation and time demands if instead an alternative range of conversion / NOL provides a simpler safe harbor .
Thanks
Permalink Submitted by Alan Spross on Mon, 2008-05-12 04:02
1) Make sure the there is no comparative benefit to carrying the NOL back up to 2 years.
2) For the current or carryforward years, there is no discretion in the amount of NOL applied. It will be used to reduce taxable income to -0- until it is fully applied. Therefore, the strategy of limited Roth conversions to use lower brackets over several years is unavailable and that calls for a conversion large enough to use the NOL up front.
3) If your Roth conversion has poor investment results, you can still recharacterize so that your NOL is not applied to phantom income and therefore possibly wasted. The recharacterization will result in reinstatment of the prior NOL or a share of it in the event of a partial recharacterization. Some recharacterization strategies such as multiple conversions and keeping only the most profitable would also work in an NOL situation.
4) I don’t think AMT would be a factor unless the NOL is comparatively small in relation to taxable income. It would not be a factor when the NOL is large enough to reduce taxable income to -0- or below the AMT exemption amount.
5) Don’t know if a conversion coupled with an NOL causes any increased scrutiny. I imagine the NOL in itself would get some attention in the year the NOL is generated, but a conversion in a later year should not add any more red flags.
Permalink Submitted by W Dobroski on Mon, 2008-05-12 18:54
THANKS Alan for the excellent insights