multiple retirement account conversion rules
I am trying to understand the 2010 roth conversion rules when someone owns multiple retirement accounts.
1. I read someplace that if If the account owner has multiple retirement accounts, you must somehow consolidate information from both accounts when determining income taxes due on the conversion.
2. If either account includes both pre-tax and post-tax contributions, does this impact the rules/calculations?
3. If you don’t convert all of the funds in the account, does the remaining funds in the existingaccount keep its existing pre-tax post-tax ratios.
4. Would the rules be different if: the 2 existing accounts are 401(k) accounts; the 2 existing accounts IRAs; or 1 account is a 401(k) and 1 account is an IRA.
5 I have used some of the roth converson calculators, but none of them acknowledge or talk about the rules when multiple accounts are present. Are there any samples/examples that explain how to plan the conversion when multiple accounts are involved.
thanks
Kathy 😀
Permalink Submitted by Alan Spross on Sun, 2010-07-18 05:04
1. That is correct. Regardless of how many TIRA accounts that exist, any non deductible contributions as documented on Form 8606 create a single percentage of after tax basis for all these IRAs. Therefore, no matter which IRA is used for the conversion, the taxable portion is determined from Form 8606 and would be the same for any of those IRAs.
2. Yes, see above
3. Yes. The conversion itself will apply some of the after tax basis to reduce the taxable amount of the conversion. That will leave a reduced total basis behind, but if there are no changes due to investment gains or no new contributions, the taxable portion of later conversions will not change.
4. Yes. Any basis in qualified retirement plans is never combined with IRA basis. Each 401k or 403b account with after tax contributions creates it’s own taxable percentage if it is converted directly. IRAs are the only type of account where any non deductible contributions are combined over all the traditional, SEP or SIMPLE IRA accounts. Therefore, if you converted an IRA and also a 401k with each having after tax or non deductible contributions, they would have different taxable percentages.
5. No, a Roth conversion calculator should have a place to enter the taxable percentage, but that is only a small part of the decision on whether to convert or not. It is generally true that the greater the basis and therefore the lower the taxable % of a conversion, the more likely it will be beneficial to convert. Accordingly, a couple where each spouse has IRAs with different %s of after tax contributions should convert the IRAs or the spouse with the lowest taxable percentage for the conversion.
Roth conversion calculators generally are geared to determine whether it is beneficial to convert or not, but none of them address all the variables involved. The prime factor is still the taxable rate for the conversion vrs the expected marginal tax rate in retirement, but the challenge is that most people will have different marginal rates in different years due to changes in their taxable income and changes in tax law. Tax rates are expected to go up, but if they pass a value added tax, it will result in the income tax rates not going up as much or not at all. A VAT would reduce the amount that someone would convert from their TIRA. Other factors include estate plans for beneficiaries, affect on Medicare Part B premiums, and whether IRA owner has long term care insurance or not. If long term care coverage exists, conversions would be higher than otherwise. Since nursing home costs are deductible as medical costs, you could pay those costs from a traditional IRA and offset most of the taxes with a medical deduction. But if you converted too much and paid the costs from a Roth IRA, there would be less taxable income to apply the medical deduction to.