Roth Conversions – basis aggregration includes SEP IRA
In 2010 taxpayers will be able to perform ROTH conversions without the current AGI limits. In reviewing Form 8606, it appears that in calculating basis (after tax contributions) allocable to the conversion that not only must all traditional IRAs be aggregated but also SEP IRAs and Simple IRAs. Two questions(and one later at bottom):
1. is the above statement correct? Ie all IRAs are aggregated?
2. what are the alternative strategies? If client holds a qualified plan in addition to IRA assets, it makes sense to roll over the IRA assets to the qualifed plan. That should be done prior to year 2010.
Often, the client is reluctant to transfer assets into the employer plan because that often results in loss of control or reduction in investment alternatives.
In practice I do not see many SIMPLE IRAs, but a plethora of SEP IRAs. Perhaps 2009 is the year to close down SEPs and open Individual K plans.
Question #3 – is there any current reading material ie articles or books that discuss the ROTH conversion planning? Does Ed have anything current in his books?
Thanks,
Jim
Permalink Submitted by Alan Spross on Fri, 2008-09-26 21:36
Jim,
1. Yes, that’s right. You have to add up all TIRA, SEP and SIMPLE IRA balances.
2. Right, if you can get your QRP to accept an incoming IRA rollover, you can siphon off the pre tax amounts from your TIRA. Although you would never want to move the basis (non deductible amount), many plans are gun shy about getting basis inadvertantly, which is strictly not allowed. They may limit acceptance of rollovers to conduit IRAs, those that you never made any regular contributions to in the hope that they would not get any after tax basis.
3. Not sure. There are no real comprehensive calculators on this because so many subjective decisions must be made about your projected future tax rates. Future tax rates would be based on both what happens to your wealth accumulation AND what happens with federal and state tax law. That is alot of guessing, even though the general consensus is that the massive deficits will cause rates to rise in the future. Now we have nearly a trillion in potential bailout debt. Then there are those who are paranoid about Roth IRA legislation that might even affect Roth taxation issues in the future.
A calculator would have to include the affect of added SS taxation in the year of conversion vrs possibly reducing such taxation in later years because of the conversion. You also have potential higher Medicare Part B premium as a result of conversion income. Estate issues include things like the brackets children will be in when they inherit IRAs and whether this makes conversions wise. In other words, you then are comparing your tax rate on conversion against your kids rate upon taking RMDs.
To keep the variables under control it is probably best to focus on just on the % of Roth assets you have vrs pre tax in order to have tax diversification if you happen to guess wrong AND not converting too much at current rates that you feel might NOT be lower than your average rate in retirement. The first conversion dollars are the best ones in seeking tax diversification.