Roth Conversion clarification
If a client over the age of 59 1/2 has an existing qualifying Roth (over five years old) and he converts an additional Traditional IRA to another Roth this year (2010). He then could take out some of the money to pay his taxes over the next two years penalty and tax free and thereby gain some tax free growth to offset the loss due to the taxes. Is this hypothetically correct?
Permalink Submitted by Alan Spross on Mon, 2010-01-18 22:12
Yes, that is possible, however distributing money from the Roth to pay taxes means that you have effectively paid the taxes out of your conversion with a one to two year delay. While the Roth may generate tax free earnings in the interim, the tax payments will eliminate further tax free gains for all the years that follow. This might not be bad in all cases, but should be carefully considered.
Another pitfall here is that once the pre conversion balance has been distributed, then conversion dollars from the 2010 conversion come out and distributions from these conversion dollars will accelerate the due date for the conversion taxes. This applies to any distributions prior to 2012. Therefore, if the conversions are tapped, the time to generate earnings from deferring the taxes will also be cut short.