IRA & ROTH CONVERSION
Two questions for Ed:
1. Are you going to be my area (Seattle, WA) for a workshop any time soon?
2. I have two specific question regarding IRA to Roth IRA conversions and am
wondering if any of your books or materials will address this. Here is the
first scenario;
A client has 2 IRA’s. One with a value of $1M and funded completely with
before tax dollars, the second worth $50k and funded completely with after
tax/non-deductible contributions. Let’s suppose that in the $50k IRA, $20k
of the value are the contributions and $30k is interest earned on those
contributions. His AGI is under 100k and so he is eligible for a Roth
conversion. If he converts only the $50k IRA to a Roth IRA, then is only the
$30k in interest taxable income to him, or is there some sort of aggregation
rule with his other (non-converted) IRA that we need to be concerned with?
A client has an LLC share in his IRA account (held at PENSCO Trust). The LLC
owns a multifamily property, and the client’s IRA share is about 1/12 of the
total ownership of the LLC. If he chose to convert this IRA to a Roth IRA,
how would the share be valued for income tax/conversion purposes? Could the
IRA owner use the discounts commonly used to value LLC units
(transferability, minority, and control) to establish a discounted value and
thus pay a potentially lower tax on the conversion? If yes, will this
require a formal appraisal?
If you could point me to any of your resources that could help answer these
questions I would be very grateful.
Permalink Submitted by Alan Spross on Sun, 2007-09-23 03:09
1) Per “Ed as a Speaker” heading, only one in your area is in Bellevue, WA on 12/1.
2a) All TIRA. SEP IRA and SIMPLE IRA accounts must be aggregated with respect to taxation of both distributions and Roth conversions. Therefore, in your example, it does not matter which account transfers the 50,000 conversion to a Roth. Only 1.905% of the 50,000 would be tax free or $953. 20/1050) Ref: Inst for Form 8606; Pub 590, p 39.
2b) It seems logical that the IRS would accept the discount because it is a true reflection of the FMV of the LLC in the marketplace. It is true that the IRS has recently cracked down on some scams attempting to capitalize on partial annuity valuations in order to convert for less than intrinsic value, but in this case the discount sounds realistic to me due to the factors you listed. However, I am not aware of an actual test case.