Conversion of traditional IRA to Roth IRA and determining taxable portions

Submitted by alberto vega on Thu, 2018-11-15 18:46

Wife(W) 67, Husband (H)71 in 2018. Salary Income is $1,500 for W only. No salary for H. Interest, dividends, capital gains with salary will be close to $170,000 in 2018. H is considering a conversion of a traditional non-deductible IRA
to a Roth IRA in 2018 because the balance of the specific IRA is $ 10,000 of which $ 7,000 is the non-deductible contributions and $3,000 are the earnings thereof. H does not have any Roth IRA. All his IRA’s are non-deductible traditional IRA.
H total IRA balances are about $1 million of which $ 350,000 are his non-deductible contributions.

W total IRA are: non-deductible traditional IRA contributions $ 50,000; earnings $10,000 =total $ 60,000. Also W has $35,000 in Roth IRA balances(principal and interest) more than 5 years old

1. Consequently assuming their MAGI is going to be $166,000 in 2018 would they be $1,000 below the MAGI to avoid
Medicare extra tax in future years if H convert this $10,000 IRA to a Roth in 2018 since only $3,000 would be taxable.
Consequently their MAGI would be $ 169,000 ($166,000 +$3,000)?
2. Does the potential conversion to a Roth by H has to be done before 12/31/18?
3. H already took all his RMD from all his IRA’s for 2018, so IRA balances above are after 2018 RMD
4. My understanding is Roth IRA balances more than 5 years old allow for all Roth distributions to be tax free, including
the principal portion and the interest earned portion. So W future withdrawals will be all tax free?
5. Consequently if H converts his traditional IRA as above ($10,000) to a Roth in 2018 then by Jan 1, 2024 his Roth withdrawals will be all tax free.



Submitted by Alan - IRA critic on Thu, 2018-11-15 23:20

  1. All of H’s IRAs are considered combined, and even if he made a ND contribution every year since 1987, it would not come close to 357,000. He would have had to roll over large after tax employer plan amounts to get to that figure. What does his 8606 form show for ND contributions?  Since his IRAs are combined for ND contribution purposes, even if the 357,000 was correct, any conversion would be about 65% taxable.  If they go over the 170k IRMAA threshold, their premiums will only be surcharged in 2020. 
  2. Any conversion must be done by 12/31 to count for 2018, and because they can no longer be recharacterized, they must be careful to avoid IRMAA surcharges, but if they go over the limit, they might want to convert up to the top of that first threshold. 
  3. Note that if H’s IRA basis is incorrect, that will change the taxable amount of his RMD. Again, a basis of 357k is highly suspect unless H rolled over after tax 401k contributions after 2001.
  4. Yes, any Roth IRA distributions for W are fully tax free and do not have to be reported on Form 8606, just on line 4a of the new 1040.
  5. Even a small conversion by H in 2018 will make his entire Roth tax free starting in 2023, as 2018 will count as the first year.

 

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