Roth IRA Conversion Feasibility

Submitted by Steve Glasgow on Thu, 2008-05-01 17:18

Current AGI is $150,000 so no can do now. However in 2010 it becomes possible.

Example: Total IRA 1.5 million dollars, age 65, and year 2010.

Is it feasible to convert in 2010?

Taxes which could be spread over two years, would have to be paid from proceeds of the IRA.

It seems as if because of the large size of the IRA and the remaining 5 years till 70 ½ and then smallish RMDs spread over the remaining years might be a better option. In other words no conversion.

Does anyone have a program that would calculate one against the other?

Steve Glasgow



Submitted by Alan Spross on Fri, 2008-05-02 05:07

It would rarely be wise to convert nearly such a large amount since it would likely blow up the marginal rate on the conversion to one that is higher than the expected rate in retirement.

If you can locate a program, it might indicate that nominal conversions in each year starting with 2010 might be best, using up whatever bracket he is already in. It might also pay to delay SS unless other income will already make 85% of his SS included in AGI. If the nominal conversions are viable, it will be best to opt out of the 2 year tax deferral in 2010 and just pay the taxes on the conversions year by year. Otherwise, use of the marginal bracket in 2010 is lost.



Submitted by Bruce Steiner on Fri, 2008-05-02 18:14

We use Excel. Before that, we used Lotus.

The tradeoff is between converting all at once to get more assets into the tax-free environment sooner and converting over time to avoid bunching the brackets.

There will be lots written on this beginning in late 2009.



Submitted by Newt Pearson on Mon, 2008-05-05 15:15

My situation is a little different …please provide any insight or comments..

Neither wife or I need each others Ira. Our children are beneficiaries.

We are planning to convert a pretty big sum in 2010 using non-Ira $
based on the following reasons

1. We do not want to be forced into RMD (or die before converting)

2. We want our children to follow the RMD rules and stretch it out
( I think the 2 nd generation’s life expectancy is run out to 109 or 110 yrs.
rather than the 82-83 ) Anyone know please confirm.

3. I have run # s manually taking into account every thing I can think of and it appears that if they follow the RMD ( per a trust ) that due to the time value , slow withdrawal and no taxes on growth …there will be more
assets/value into the future than any other option

We are looking at this as an additional S.S. or pension our kids would have
in their late years (The RMD doesn’t really become real significant in until
65-75 and those are years we want to provide a possible safety net.

4. We are not willing to postpone the conversion because this could be a once in life time opp. My guessing we may never see a top 35%

5. It will be a large tax to pay but I still think my numbers indicated that the time line
and plan worked out best at a point way out into future even paying 35%
conversion tax now. I don’t think the #’s look near as good for different
withdrawal amts or shorter time lines.

Would love to have comments or have pointed out anything I might be over looking…can not find any info on this strategy



Submitted by Alan Spross on Mon, 2008-05-05 17:49

I tend to agree that if you are in the top bracket now, future prospects seem to indicate that you can expect future marginal rate increases. Unless 2011 or 2012 is the effective year for an increase, the two year deferral for 2010 conversions would provide you with some extra deferral time for the tax payments.

You are also correct that a trust will be needed to limit access to the Roth assets to the RMD or other higher amount you choose. You must also determine if the trust is to accumulate the distributions or pass them through and for how long. Any accumulation provisions also tend to remove the childrent’s marginal rates as a factor in determining if a conversion should be done.

Table I in Pub 590 determines the RMD divisor, and age 111 calls for total distribution of any remaining funds. The current tables came into use in 2002. Perhaps after several more years, the mortality charts will change again to indicate longer life expectancies if the longer expectancies materialize.

If this conversion is large enough, you even might consider relocating to a no income tax state for the years the taxable income is to be reported. If you live in a high tax state, this might amount to nearly 10% savings on the conversion taxes as well as your other taxes for those years.

Of course, there may be other factors to consider other than purely income tax rates including possible estate tax benefits from removal of the conversion taxes from your estate. On the other hand, how you plan to address any long term care bills also plays into the amount you would choose to convert.



Submitted by Newt Pearson on Tue, 2008-05-06 14:51

Thank You Alan-oriras

1. If I do convert in 2010 , choose to not take withdrawals and die before
this 5 yr period…how does this effect R.M.D. ? I guess I’m saying I don’t
understand this 5 yr thing? Does it effect my example ?

2. Distributions are to be passed on thru to kids. Am I correct that if we convert but never withdraw , upon our death, R.M.D. must begin for them

3. Am I reading that the R.M.D. must be paid but could remain within a trust ?

4. If they can , are you saying the trust tax rate is applied ?

5. Have only read 1 sLott book … a friend recently told me he had read 3 and he recalled Slott discouraged IRA’s in Trust because it had less favorable rules? What rules if RMD are passed on through ? Only warning I remember was that all lawyers couldn’t set them up correctly and to be very careful . Any other negatives or should I read his other books?



Submitted by Bruce Steiner on Tue, 2008-05-06 15:01

Ed and I have different views on trusts as beneficiaries of retirement benefits. For more on my view, see my article on this in the March 2004 issue of the BNA Tax Management Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf

Each case is different, but there are lots of benefits to converting to a Roth IRA in many cases. Much will be written on that subject in the latter part of 2009.



Submitted by Alan Spross on Tue, 2008-05-06 18:14

Newt,
There is a 5 year holding requirement from the year of your first Roth contribution that is one of the requirements to be met for all distributions to be tax free. This period runs beyond your death as if you were still alive. However, your beneficiaries who take withdrawals are deemed to be withdrawing first from regular contributions, then conversions and finally earnings. Therefore, if they take modest distributions they will not be tapping Roth earnings until well after the 5 years is completed.

There is another 5 year holding period for each conversion to avoid penalty if you have not reached 59.5. But this penalty is also removed if you pass and the Roth is inherited. Roth beneficiaries never pay an early withdrawal penalty. Their only concern would be the penalty for failing to take their RMD each year. Your example would not be affected by the 5 year holding period for the above reasons.

Re #2 – Yes, RMDs must start prior to 12/31 of the year following your death whether they inherit directly or through a trust. If they inherit directly, then can create separate accounts and each beneficiary can use their own remaining life expectancy. RMDs to a trust beneficiary must be based on the oldest trust beneficiary. If you left your Roth to your surviving spouse, she could assume ownership of it and avoid RMDs until after she passed it to the children. Of course, if you did this, the Roth balance would be included in her gross estate for estate tax considerations.

#3, #4 – Yes, the proper RMD must be distributed out of the Roth regardless, but the RMD amount may be different for a trust beneficiary than an individual (designated ) beneficiary. If a trust is written to accumulate these RMDs without passing them through, the trust would pay the taxes, but with a Roth there are no income taxes, so this is not a problem. However, if the trust can accumulate the RMDs be careful not to have older remainder beneficiaries named as successor beneficiaries of the children, or the RMD would have to consider those older remainder beneficiaries and Roth distributions would be accelerated. Note that Roth distributions into the trust will begin to earn investment income in the trust that will be taxable at the higher trust rates if those distributions remain in the trust rather than being distributed to the trust beneficiaries.

Read some of Bruce’s articles if you want a more detailed break down of trust beneficiary ramifications.



Submitted by Newt Pearson on Wed, 2008-05-07 13:27

Thanks Alan…You are very clear with all your responses.

bsteiner…thanks

One more reason for the IRA in trust is my daughter is not as up to speed on
investing as she should be…simple stuff like indexs and solid approaches
that I’m just now accepting. My wife and then son will be trustee ,hence , able
to follow a sounder investment path. Really struggled with this but couldn’t
come up with any other option except the trust.

Thank you all again



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