converting tiras to roth iras
I have 15 different tiras for the 15 different years I could put money into an ira. Now I have been putting money into different roth iras when it became available. I have taken money out of one tira this year and converted it to a roth ira. how do i handle the tax consequence on that conversion in this 2008 tax year. thanks for all the help.
Permalink Submitted by Alan Spross on Wed, 2008-07-16 19:37
Unless you have made prior non deductible contributions to any of your TIRA accounts and filed Form 8606, the conversion will be fully taxable. You will get a 1099R reporting the conversion, and will report the conversion on Form 8606. The taxable amount will flow to line 15b of Form 1040.
If you DID make prior non deductible contributions to any of your TIRA accounts, then your conversion will have a small amount that is not taxable. This also is calculated on Form 8606, and avoids any double taxation.
If your income turns out to be too high to convert (100,000 not counting the converted amount), or even if you change your mind, you can recharacterize the conversion no later than October, 2009. This reverses the conversion and you will be treated as if you never converted in the first place.
Permalink Submitted by Richard Partin on Wed, 2008-07-16 20:31
Thanks Alan for your reply. So does this means I can convert all my tiras as long as my income(including dividends and interest) is less than 100,000? I am married filing jointly. I also have the money to pay all the taxes without touching the ira itself. Does this sound like a good idea?
Permalink Submitted by Alan Spross on Wed, 2008-07-16 21:18
No way to tell for sure without considering a number of details, the most important of which is that the tax rate you would pay for the conversion would be no higher than the rate you expect to pay in retirement. Frequently, the rate you will pay in retirement depends on your asset levels and income in retirement.
But the more you convert in one year, the more likely you will increase the rate you pay now for the conversion. For that reason, it usually makes more sense to convert modest amounts each year so that your tax bill for the conversion will not include a higher bracket. Some people find that if they convert no more than the amount that brings them to the top of their current bracket, they feel they will not be paying more for the conversion than their retirement rate.
So, your first question is whether you should convert at all, and if so how much should you convert in any given year? You would be more likely to convert in a low income or high deduction year than vice versa. People who are big time savers and face large RMDs are also more likely to benefit from conversions than those who retire with not a whole lot more than SS income and a small pension.
In a different subject, you should probably consolidate those separate accounts even if you do not convert. That’s alot of paperwork and you might also be incurring some small account administrative fees each year.
Permalink Submitted by Richard Partin on Thu, 2008-07-17 13:21
Alan, thanks again for the responce. Will I be subject to a 10% penalty for early withdrawal if I convert the tira to a roth, being 55years old?
Permalink Submitted by Alan Spross on Thu, 2008-07-17 20:04
No. There is no early withdrawal penalty for a Roth conversion in the year the conversion is done, just the ordinary income taxes.
However, if you take withdrawals of the Roth conversions in the first 5 years including the year of conversion, the penalty is incurred on those distributions. This penalty stops at age 59.5. Therefore, in your case, you will be free of any early withdrawal penalties from any of your IRAs at age 59.5.