11 Replies Latest reply on Aug 26, 2010 2:14 PM by JerryD

    Roth rollover

    Chemist
           I am 77 and an receiving a yearly minimum distribution. Is it advisable to withdraw extra money and start a Roth IRA ?
        • Re: Roth rollover
          jkom51

          Simply: no.

          For one thing, you need actual earned wage income to open a Roth. Social Security or dividend payments don't qualify.

          Secondly, unless you intend to leave the Roth to your heirs, it's likely you wouldn't earn enough off compounding for it to be worthwhile. Usually it's a minimum 15-20 yrs compounding needed to offset the taxable investment in a Roth.

          Now, if you are talking a CONVERSION of your IRA to a Roth, that's different. This is the year to do it, for it's the only year you're allowed to split your tax bill payment over two years. If you have an IRA you want to leave to your heirs, and can pay the tax bill, conversion to a Roth is an excellent idea.

          Do not do anything, however, without consulting a good tax advisor! Good luck.

            • Re: Roth rollover
              auwekamanu
              Please remember, too, thsat if you decide to turn part or all of your IRAS into Roths, you will have to do so proportionately from all of them, niot just choosing one.
                • Re: Roth rollover
                  Francisca
                  Not sure I understand why you need to rollover from a traditional to a Roth IRA proportionately.  Can you elaborate?
                    • Re: Roth rollover
                      jkom51

                      Proportionate conversions are required IF you have ever made after-tax contributions to ANY of your IRAs. The IRS does not allow you to differentiate the funds involved, in such case. If all your funds are pre-tax, then you can convert part or all of any account.

                      A full explanation can be found at: http://www.bankrate.com/finance/retirement/7-steps-to-a-2010-roth-ira-conversion-1.aspx. It's possibly the most complete article I've seen yet on this complex subject. HTH.

                        • Re: Roth rollover
                          jeffsolly
                          jkom51 said...

                               
                                    

                          Proportionate conversions are required IF you have ever made after-tax contributions to ANY of your IRAs. The IRS does not allow you to differentiate the funds involved, in such case. If all your funds are pre-tax, then you can convert part or all of any account.

                          A full explanation can be found at: http://www.bankrate.com/finance/retirement/7-steps-to-a-2010-roth-ira-conversion-1.aspx. It's possibly the most complete article I've seen yet on this complex subject. HTH.

                               
                                          



                            • Re: Roth rollover
                              jeffsolly
                              New York State taxes could be a consideration. Taxpayers over 59.5 are allowed to remove from their IRA/401/403 up to 20K per year without paying NYS taxes on the funds. Will the Roth rollover be subject to NYS taxes?
                                • Re: Roth rollover
                                  auwekamanu
                                  I don't know the answer to that excellent question.  I believe that the first $20,000 would be free of NYS tax if you are 59.5 yr old, but I may be wrong.  The rest would be subject to state tax, and of course the whole would be subject to federal tax, but I am not certain.
                                    • Re: Roth rollover
                                      jeffsolly
                                      If a Roth Rollover would be subject to NYS taxes then it would probably not pay to convert.
                                        • Re: Roth rollover
                                          auwekamanu
                                          I looked at the possibility of converting part or all of my IRA's to Roths this year and decided against it.  My reasoning was that I am still working now, and have a higher tax burden than I will when I actually withdraw the money to use it after I retire. 
                                          I have been unable to invest new money in Roths for a number of years now- fortunate enough to have AGI that is too high- but my wife and I DID have some that we were able to invest in stocks that held up well during the downturn.  They have done well for us, and could provide about 20% of our retirement income if we decide to actually start taking some of the gains.  We will not use them, however, preferring to keep them as a nice nest egg for the kids.  They can be passed on cleanly to them.  I would urge the kids to only take 4% or so from them, but they will probably not listen!
                                          • Re: Roth rollover
                                            JerryD
                                            jeffsolly said...

                                                 
                                                      If a Roth Rollover would be subject to NYS taxes then it would probably not pay to convert.
                                                 
                                                            

                                            Don't know about NYS taxes but here in Arkansas, each spouse can get a $6000 exemption for such conversions. Check it out.
                                              • Re: Roth rollover
                                                JerryD
                                                DISCLAIMER: I AM NOT A TAX ADVISER

                                                A bit off of the original post but a little thought turned an excess of Federal tax deductions/exemptions into an opportunity. This can occur for a number of reasons but in my case it was loss of a job (or 2 or 3 over a number of years). This can happen to our kids and grandkids also so it could be some sage advice to anybody.

                                                When excess deductions/exemptions occur for whatever reason these can be a no-cost opportunity to convert an IRA to a Roth and thus protect that money for all time from taxes (even for those who inherit). Even with the standard deduction this can be a chunk of money that is a "free" conversion, well almost.  You have to look at state tax implications also and of course your total income must allow it.

                                                Let's say after doing the taxes it turns out that you have in effect $5000 or so in deductions not off set by income then convert that much of your IRA to your Roth. One thing to be aware of is that must be done by December 31 NOT by April 15 (Boy, we should all tell our Federal reps to change that one).

                                                Another "opportunity" arises when one has a "low" income where a bit of savings can be used to pay a low Federal marginal tax rate to convert an IRA to a Roth. If you haven't ever done the what-if, one can stay within the 15% marginal tax rate and still easily convert $50-60,000+ (depending on our income, etc.). Again, be absolutely sure you understand the state tax implications. I had several interesting discussions trying to explain to Arkansas that it is a taxable event and when I failed several times I paid some painful taxes when I finally got an auditor a number of years later that really understood and agreed - PAY UP. 

                                                On this last "opportunity" your what-ifs might prove to you that converting as much as possible up to a lower marginal tax rate can in effect lower your taxes for several years after mandatory required distributions (MRD's) start for your IRA at 70 1/2. And if you really love to mess around with spreadsheets, you can prove to yourself that you save some very impressive money in taxes by avoiding MRD's over your and your spouses lifetime due to the Roth tax shelter. I never did the tax reduction exercise for my beneficiaries but it is probably much larger if they have the discipline to stretch it over their lifetime and avoid lump sum distributions. And I didn't even consider looking at what if they took this excess money and reinvested as much as possible in their Roth. The effect can be generational!