Regular IRA/Roth conversion

Submitted by Dennis Bowman on Sun, 2008-09-21 00:58

I’m Retired, 62, Can I make a one time $50,000 convertion to a new Roth account from my regular IRA account as long as I stay below the adjusted AGI of $100,000?



Submitted by Alan Spross on Sun, 2008-09-21 01:59

Yes, the only conversion limitations are not exceeding 100,000 MAGI and not filing married separate returns. The converted amount does not count in the MAGI figure.

That said, you might want to consider spreading your conversions into more years with smaller amounts so you do not elevate your marginal tax bracket. And when you initiate SS retirement benefits also factors heavily in determining your marginal tax bracket. If your situation permits, try to convert more before starting SS or delay SS and reduce your penalty for starting prior to your normal retirement age, which is 66.



Submitted by Dennis Bowman on Mon, 2008-09-22 12:22

Alan,

Sorry, I’m new at this form and the IRA business.

Okay, so I can convert a lump some, that’s great. But you lost me with your statement ” the converted amount does not count in the MAGI figure.”

I understand about the SS but since my wife and I retired at 55 and have spent the major portion of our tax free money enjoying our retirement the SS has become a slight issue.

So The question is, which is the lesser of the two tax evils, taking SS or taking distribution from a my regular IRA account?

My thinking is to convert a portion of what I have in the reg. IRA now,(pay the taxes ) add some each year and let the Roth grow (hopefully) over the next 8 years so that when I reach 701/2 I have some tax free money to pay the taxes with when I due need to start taking distribution from the reg. IRA. Or em I misunderstanding the tax issue at that age when you have to start taking distributions?

The tax issue seems to me to be an endless cycle once you start taking distributions and would deplete the reg. IRA a lot faster, If you don’t have tax free money to pay the taxes on the the distributions. Or em I completely wrong about that?



Submitted by Clyde Wolf on Mon, 2008-09-22 17:42

Ahoydocnpj,

To qualify to do an IRA conversion in 2008 and 2009, your MAGI must be less than $100,000. The amount you are converting is not included in your MAGI. In 2010 this $100,000 MAGI limit will go away.

MAGI is your AGI plus adjustments to income (1040 lines 23 thru 35) minus your conversion amount. Example: AGI is $120,,00, and you were converting $50,000 to a ROTH IRA, your MAGI would be $70,000. And you had adjustments to income of $10,000 that would be added to the $70,000 your MAGI would be $80,000. This MAGI would allow a ROTH IRA conversion in 2008 and 2009.

When you are receiving SS benefits, the amount you are converting from your Traditional IRA (TIRA) will impact the taxability of your SS benefit. As you increase your conversion amount, more of your SS benefit will become taxable. Up to 85% of your SS benefit may be subject to income tax.

As for using your ROTH IRA, You never have to take a distribution from your ROTH IRA. When you take a distribuiton from your ROTH IRA and the amount you take is your choice.

If you still have a TIRA at age 70.5 you must begin to take Required Minimum Distributions (RMD) from this IRA. You can use this to pay your your taxes, leaving your ROTH IRA to continue to grow.



Submitted by Dennis Bowman on Tue, 2008-09-23 07:10

Would the 85% tax apply only to the IRA holder or to the wife’s as well since we file jointly?



Submitted by Clyde Wolf on Tue, 2008-09-23 16:15

Ahoydocnpj,

The total SS benefit reported on your 1040 line 20a is for both taxpayers when filing jointly.

The taxable amount of the SS benefit is calculated using the Social Security Benefits Worksheet in the instructions for line 20. The taxable amount is based on the amount of line 20a, total SS benefits, and your total income from sources other than SS. The taxable amount is reported reported on1040 line 20b. This can be as much as 85% of line 20a, although it is often less.

You can not make a ROTH Conversion if you are married filing separately.



Submitted by Dennis Bowman on Wed, 2008-09-24 15:23

OK Gentleman,

I have a client, Just kidding.

I went through the 1040 form and I came up with a big fat “O”, (and this will be the last year that will happen) we do file jointly so that’s not an issue. So if I wanted to convert $ 50,000. or $200,000. What’s the next?



Submitted by Clyde Wolf on Wed, 2008-09-24 17:13

Ahoydocnpj,

I trust you are your own client.

Your last post is somewhat cryptic. You say you have a big fat zero on your 1040, but you do not say where on the 1040. I understand your reluctance to provide too much information on an open forum such as this.

You could discuss this with your tax preparer to determine how much tax would you pay when you convert various amounts to a ROTH IRA.

If you prepare your own tax return using software, enter your data for the year and on line 15a and 15b enter the amount you are considering for conversion. Then look at your tax bill. You can change the conversion amount so you will get a tax bill you are OK with paying.

Do not put this off as the conversion must be completed by December 31, 2008.



Submitted by Dennis Bowman on Wed, 2008-09-24 19:31

The forum must have timed out and posted my post before i got it finisned.

Any way, The big fat “O” is on line 77 because I have not worked since I was 55 and I get no income from any other source other pre taxed money and SS.

Now I went back to line 15a and the instructions for it, form 8606 it states that only $10,000 convertion can be made, but that may be 2007 ?

To calculate tax for a conversion amount, is there a formula like: amount times tax base, minus deductable = taxable amount, or do I enter the whole conversion amount on line 15b?



Submitted by Clyde Wolf on Wed, 2008-09-24 21:25

Ahoydocnpj,

Thanks for the clarifications.

I do not see how form 8606 can limit your Conversion to a ROTH IRA.
Form 8606 is used to report after tax contributions to our IRAs and in some cases distributions from after tax IRAs.

There are many things on the tax return that interact.
You must have some inerest income, perhaps some investment income/loss, qualified dividends, etc.

Put the amount you want to convert from your TIRA on line 15b.

Then look to see what it does to the taxability of your SS benefit on line20b.

Also look at your taxable income, line 43.

Do you have any tax credits to claim?

Do you owe any other taxes?

Did you make any estimated payments?

The main difference between 2007 and 2008 tax return will be the difference in personal exemptions (+$100 each) and the standard deduction (+200).
If you are using 2007 tax return software, put $400 on line 21, Other Income to compensate for the differences of the standard dedcution and personal exemptions. You can get very close to the amount you want for your answer.

Line 73 will show you any refund you may have.
Line 76 will show what you owe.

Line 77 is your penalty for underpayment of taxes.



Submitted by Alan Spross on Wed, 2008-09-24 21:50

Part I and II of Form 8606 requires completion if there were any non deductible contributions ever made to any of the IRAs. Otherwise, Part I is not needed and the conversion can be entered on Part II and line 15b of Form 1040 as a fully taxable amount. This exercise should be completed prior to determining how much added AGI from the conversion will be entered into tax software.

If there were any non deductible contributions, Part I will calculate how much of a distribution or conversion is taxable.



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