ROTH CONVERSION
I have a client with 2,400,000 in his IRA. He is 61 and has been told he can do a roth conversion now and pay the tax out of the roth next year 4-15. can he do this? I understand this is for 2007 rules. jg[/b]
His income is 60k from pension and 60 from ira withdrawals but we are told the ira w/d will not count against his magi. is this true?
Permalink Submitted by Alan Spross on Wed, 2008-04-16 01:02
It is true that the converted amount does NOT count toward the 100,000 modified AGI limit over which a taxpayer is not eligible to convert. Other IRA distributions that are not converted do count.
There are various options for the tax bill resulting from the conversion. Taxes can be withheld from the TIRA and a taxpayer over 59.5 will not incur early withdrawal penalty on those taxes, although the withholding itself will be taxable. For that reason it is generally recommended to pay the taxes from other available funds, usually through quarterly estimates or other withholding sources. For example, taxpayer could increase or initiate withholding on the pension checks.
A combination of the two can be used, however withholding is deemed to be paid equally over the year whereas estimates are only credited in the quarter paid. Even if additional taxes are due in April, 08, there is no penalty if estimates equal to the 2007 tax liability are paid over the course of the year.
The client should be very careful not to convert such a large amount that he increases his marginal rate above the rate he expects in retirement. The decision on how much to convert is complex and involves a very detailed analysis assisted by a crystal ball with respect to changes of fortune and future tax rates.
Permalink Submitted by Edward Czapor on Wed, 2008-04-16 03:29
Your information source may be under the impression that the 60k from IRA withdrawals represents a RMD. RMD amounts also do not count towards MAGI as with the converted amount.