Big Roth conversion, to do or not to do…
I have a 74 year old client and she has about $500,000 in IRAs and 403Bs, she has plenty of after-tax assets and her RMD is not spent. She is looking at about $154k in AGI and $94k taxable without a conversion. Her fed and state tax bill with all credits etc. will be about $21k. If we convert her whole IRA it would be a total of $215k in taxes. That is a big difference.
I am leaning towards it because a good chunk of her income is qualified divs and that tax benefit will go away in the future. But that is a BIG tax bill to recommend.
Permalink Submitted by Alan Spross on Thu, 2010-09-23 01:43
Well, I am not sure that qualified dividends are going away, or if they do, when that will be.
But one of the advantages of a Roth conversion is the ability to recharacterize all or part of it after many of these variables have been determined. Another flexible benefit is that the same extended due date is the deadline for determining if a 2010 conversion will be taxable in 2010 or equally in 2011 and 2012. Even with the two year deferral, conversion of the entire account may inflate her tax bracket too much. But all this can be determined over the next year. If she does not convert at all, she will be locked in to whatever happens with the dividends and tax rates. But with tax software all the various recharacterization scenarios can be run before determining the final decision after all the other details are known, at least for 2010 and probably 2011.
Permalink Submitted by Mark Hilgenberg on Thu, 2010-09-23 15:06
Thanks Alan, I do like knowing there is a “do-over” that does help. Not knowing what congress is doing for 2011 has been frustrating but knowing I really don’t have to know until October of 2011 helps, I imagine they might have passed something by then. 🙂
Permalink Submitted by Alan Spross on Thu, 2010-09-23 20:17
Yeah, I guess one of these days we are going to test the limits of retroactive tax legislation.