Roth Conversion
I am currently working with a client who is thinking about converting his $500,000 IRA to a Roth. Problem is he does not have the resources to pay the income tax. If we convert to a Roth and he borrows the income tax liability ($approx. $150,000) from the bank, can he use the Roth funds as collateral for the bank and then withdraw the necessary money to pay the loan off at the end of 5 years tax free? He understands he will have to pay the interest during the 5 years from his own money.
Permalink Submitted by Alan Spross on Tue, 2010-05-04 20:48
IRA funds may not be used as collateral for a loan.
In the vast majority of cases, a conversion is unwise if the funds need to be taken from the distribution, and although he hopes to avoid that, it also appears that he may not have enough other resources to make a conversion of this size advisable. Of course, there are always exceptions.
After 5 years he could withdraw up to the amount of his conversion tax and penalty free.
Perhaps he should convert a much smaller part of his IRA, since the most basic factor for Roth conversions is that the tax paid for the conversion not exceed the estimated marginal tax rate in retirement.