Roth Conversion Tax, Inherited IRA and RMD Questions Highlight Slott Report Mailbag

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

As crisp temperatures and autumn colors cascade through our neighborhoods, people start eying year-end IRA and tax planning.  We saw it in this week’s Slott Report Mailbag with questions about a Roth conversion and paying the tax associated with it, distributions from inherited IRAs and the rules regarding what you can and can’t do with RMDs (required minimum distributions). As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

I am doing a partial conversion of my traditional IRA to a Roth IRA. I know that I will owe taxes and will use another source (not the traditional IRA) to pay the taxes. One way I am thinking about covering the taxes is to use stock losses (realized in my brokerage account). Is there a calculation to figure out how much of the taxes I will owe for the conversion will be covered by the stock losses from my brokerage account?

My guess is that it depends on the tax bracket for my AGI (adjusted gross income), which will be lower as a result of the stock losses, but I’m wondering if there is a calculation to help me approximate how much stock losses from a brokerage account would offset the taxes owed for the partial conversion. I hope this question makes sense and thanks for taking a look. Keep up the great work and thanks for the help!

Thanks,

Jeff A

Answer:
It does depend on your AGI and corresponding tax bracket. Tax deductions, tax credits and other tax benefits can be used to offset Roth conversion income – but NOT capital losses. Capital losses can only offset capital gains and up to $3,000 of other income like Roth conversion income.

One thing we frequently recommend is that you run the numbers through a tax program. You do two “returns,” one with the Roth conversion and one without. That will give you the truest picture of the impact of the conversion on your taxes. In your case, you can play around with various stock loss amounts to see what works best for you.

2.

I have two inherited accounts after the death of my sister, one an IRA and the other a Roth IRA. When I take my minimum distribution based on my life expectancy next year, does the distribution have to come out of each account separately or can I take it out of whichever account I choose?

Answer:
The distribution must be taken from each inherited IRA. The tax treatments are different for each one (i.e., the IRA is taxable and the Roth is generally tax-free). Also, you cannot combine the two inherited IRAs.

3.

Hi Ed,

If someone is over age 70 1/2 and starts taking their RMD for a given year, can they “convert” this RMD amount over to a Roth IRA? Assume the person has no earned income and is only considering converting the RMD amount for the year into a Roth, not any other portion(s) of their Traditional/Rollover IRAs.

Lastly, what if they do have earned income? I think the answer is “No” for both situations.

Thanks,

Matthew Holmes
Cincinnati, OH

Answer:
You are correct. The answer is “No” for both situations. RMDs can never be converted to a Roth IRA. However, if someone over age 70 1/2 has earned income, they can make an annual contribution to a Roth IRA assuming their total income does not exceed certain levels (e.g., $173, 000 in 2012 for a married couple filing jointly).

4.

If you are not working and your wife is employed, can you contribute to a Spousal IRA that is not in her name? Assume that income is not over the threshold of $173,000 if you are married filing jointly. Income earned by the spouse is more than the contribution.

Regards,

Al Horila

Answer:
Spousal contributions can be made to your IRA using your wife’s income (compensation). Your IRA must be in your name only; it cannot be in your wife’s name. There is no income limit to contribute to a traditional IRA but there is a $173,000 income cap in 2012 for contributing to a Roth IRA if you are married filing jointly.