ROTH conversion
I have a 68 year old client who owns a tradional IRA and a 7 year old ROTH IRA. He is planning on converting a portion of his IRA to a ROTH IRA in 2010. What are the pros and cons of converting to his existing ROTH IRA account versus converting to a new ROTH IRA account?
Permalink Submitted by tomd37 on Wed, 2010-06-09 17:51
The only thing that comes to my mind is that if he converts his traditional IRA and places it in a new separate Roth account, he then keeps it separate from his existing account in the event he might recharacterize the conversion at a later date. Not comingling the accounts would keep it much cleaner. Later, if he determines he is going to keep the conversion as is, it could be transferred to the existing older Roth.
Tom D.
Permalink Submitted by Kevin Traina on Wed, 2010-06-16 19:23
What does recharacterizing have to do with it? Also if you convert this year you pay this years tax rate you can split it up over the next 2 years but tax rates might be higher.
Permalink Submitted by Joseph Arsenault on Wed, 2010-06-16 19:46
Tompam is correct, the one benefit would be the ability to recharacterize only those funds when the time comes if his account has dropped in value. Sometimes people will convert into multiple Roths, hold different types of investments in each Roth, and only recharacterize the ones that lose money. You could consider it a cherry picking strategy.
Permalink Submitted by Alan Spross on Wed, 2010-06-16 19:49
Recharacterizing is just an option to reverse all or part of a conversion. This might be done for a variety of reasons including:
1) The value of the assets converted has dropped, and you do not want to pay taxes on phantom values
2) You are having trouble coming up with the money to pay the conversion taxes.
3) Something happens to change your estimate of your future tax rates in retirement, ie a disability or other serious health problems, a divorce, etc.
4) The prospect of a valued added tax in lieu of further income tax rate increases advances
5) Congress passes a large income tax rate increase for 2011 and beyond and you do not have the money to opt out of the two year deferral and report all the conversion income in 2010.
6) Executing a multi conversion strategy such as posted above.
Converting to a NEW Roth account instead of a prior existing Roth account will limit the calculation of how much goes back to the TIRA to the converted assets only. The lower that amount that goes back to the TIRA, the better. If the conversion is added to a prior Roth, this calculation can work for or against you in the event of a recharacterization.