Bankrupcty and Roth Conversions
Hey there, anyone able to help?
I was asked to help a cleint with a possible bankruptcy case and I was wondering if we could convert a traditional ira to a roth ira, pay in the estimated taxes to the feds with expectations that the tax money sent out would be outside the reach of the creditors, leaving him with roth ira? I have read Eds books and this example is used in the case of reducing a clients gross estate, but I dont remember any mention about bankruptcy.
This client is in Michigan, and his AGI is well under the 100k limit. Another thought of ours would be for this client to buy an immediate annuity….?
Any help would be appreciated.
George
Permalink Submitted by Alan Spross on Thu, 2009-07-16 23:00
According to link, MI provides 100% IRA protection which includes Roth or TIRA. But best to check this out locally in case of any changes.
http://www.assetprotectionbook.com/state_resources.htm
Therefore, there is no reason related to asset protection to convert, although there may be other reasons to do so. I think Ed was referring to simply reducing estate tax exposure by converting to shrink the gross estate by the amount of income taxes paid on the conversion.
Of course, if the creditor is the IRS or a former spouse, then none of these exemptions apply.
Permalink Submitted by George Smojver on Fri, 2009-07-17 13:32
Thanks for the reply,
What I was trying to protect was about $100,000 in non IRA dollars. Some of this money can go to a home, an IRA contribution for the year, or a college plan, but there are limits on what will be protected. However, if $30,000 went to the IRS for the tax upon conversion, could the creditors attach to the $30k? My thought is that the IRS would be first in line, but I dont know. I am working with a Bankruptcy Attorney on this and any insight or direction will help.
George
Permalink Submitted by Alan Spross on Fri, 2009-07-17 18:56
I think that taxes once paid to the IRS cannot be attached, however once there is a tax refund of any of that money, it would be at risk.