Your Tax & Business Advisor
Should I Convert My
Traditional IRA to a Roth IRA?
By Raymond S. Kulzick, CPA, DBA
As published in the Pinecrest Tribune. December 7, 1998.
Should I convert my traditional IRA to a Roth IRA?
One of the most significant tax changes for 1998 is the new Roth IRA. In my last column, I addressed the advantages and limitations of contributing to a Roth IRA.
In order to make the attractive features of the Roth IRA more available, Congress allowed individuals to convert all or part of their traditional IRAs (including SEP-IRAs) to Roth IRAs for 1998 and future years. In general, individuals who are not close to retirement and who can leave all the funds in the Roth IRA for at least five years are more likely to benefit from a Roth conversion. However, whether or not this is attractive to any particular individual - or even allowed - is a complex decision.
When you convert a traditional IRA to a Roth you are essentially making an allowed withdrawal from the old IRA and a deposit in the new Roth IRA. Regular income tax (but no penalty) is due on the total amount that is converted less any non-deductible contributions that have been made. Non-deductible IRA contributions should have been reported each year on form 8606 filed with your income tax.
For qualified conversions made before December 31, 1998 (1998 conversions), Congress allows you to spread out the income tax due over four years (1998 through 2002) if you so elect. You also may elect to pay all the taxes now. For conversions made in 1999 or later, the total income is taxable in the year of the conversion. Be sure that you are able to pay the income taxes due on the conversion from funds outside your IRA. There is no withholding and taxes may not be paid out of your IRA funds without penalties.
Because of the decline in the stock market (and therefore the value and amount taxable in your traditional IRA account) and the four-year averaging election, 1998 may be a particularly advantageous year in which to convert to a Roth IRA. 1998 conversions must be completed no later than December 31, 1998.
Roth conversions are allowed only if your "Modified Adjusted Gross Income" (MAGI) is less than a specified amount and other conditions are met. MAGI is the same as Adjusted Gross Income, with a few exclusions. The most important exclusion is that any income from a Roth conversion is not counted.
In order to be able to convert, MAGI in the conversion year (1998 if you are converting now) cannot exceed $100,000. The same limit applies if you are single or married filing jointly. In most circumstances, married people who file separately are not allowed to convert to a Roth IRA. All conversions also must meet rules on rollover contributions. We generally recommend that these conversions be done trustee-to-trustee to avoid possible problems. Remember that the funds must be in the new Roth IRA prior to year-end to qualify; so don't wait until the last moment.
Since the $100,000 limit may effect many taxpayers who don't know what their actual income will be until after year-end, Congress passed corrections in 1998 to allow conversions to be reversed. So, if you convert and later find out that your income is too high, you can reverse the conversion. Reversals must be completed before the filing date for your return and there are various limits and restrictions. If you expect your income to be over $100,000, there may be strategies to lower your MAGI. For example, you may be able to defer income or accelerate losses.
Conversion of all or part of your existing traditional IRA to a Roth IRA could be a very beneficial alternative for many Americans, particularly in 1998 - but don't make the decision lightly or solely in response to advertising. Taxpayers should seek professional advice before converting and be sure that they understand the advantages and disadvantages of not only a conversion, but the Roth IRA itself.
Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or firstname.lastname@example.org. More information is also available on the firm's Web site at http://www.kulzick.com/businesspro.
This article provides information of a general nature only and should not be acted upon without seeking appropriate professional advice concerning your specific situation.
© Copyright 1998 Raymond S. Kulzick. All rights reserved. 981207.
Should I Contribute To a Roth IRA?
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.