Roth Ira Conversions
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Transcript of Roth Ira Conversions
Roth IRA Conversions
By Ward J. Wilsey, JD, LLM3655 Nobel Dr. Suite 345
San Diego, CA 92122(858) 764-2672
Ward J. Wilsey, JD, LLM
BA in Economics from UCSDJD from University of San DiegoLLM in Taxation from Washington
University in St. LouisEstate Planning Attorney with the Wilsey
Law FirmFrequent lecturer with several providers of
continuing legal education for attorneys, including the National Business Institute
Roth IRA OverviewRoth IRAs are treated exactly like regular
IRAsExcept for where the Internal Revenue Code
specifiesThree main advantages
Distributions are Tax FreeNo Required Minimum Distributions (“RMDs”)No Maximum Age for Making Contributions
DisadvantageCannot Deduct Contributions
Minimum Distributions Rules for RothsNo Lifetime Required Distributions
408A(C)(5)Post-Death RMD rules do apply
Reg. § 1.408A-6, A-14(b)Roth distributions and conversions do not
fulfill MRD requirements for a traditional IRAReg. § 1.408A-6, A-15
Roth DistributionsQualified Distributions are Tax Free if they
meet two requirements:Five Years after first contribution
§ 408A(d)(2)(B)And one (or more) requirements of § 408A(d)
(2)(A) are met:After Age 59.5After Participants deathAttributable to Participant being disabled
Ways to Fund Roth IRARegular Contributions
Less of Contribution or the applicable dollar limit§ 408A(C)(2)Less Traditional IRA Contributions
Applicable Dollar LimitYear Dollar Limit Add on Over
50
2002-2004 $3,000 $500
2005 $4,000 $500
2006-2007 $4,000 $1,000
2008-2010 $5,000 $1,000
Income Limits for Contributions2009
Single Income Limit of $105,000 MAGIPhase-out to $120,000
Married Income Limit of $166,000 MAGIPhase-out to $176,000
Basically no contributions for Married filing separately
Rollover Roth IRATransfer Funds from Traditional IRA
Amount includible in gross income§ 408A(d)(3)(A)-(C)
Three Ways (§408(d)(3)(A)(i))Cash from Traditional contributed to Roth
within 60 DaysPlan to Plan Rollover Re-designated by Custodian
Who May Convert?2009
Income Limit of $100,000No age requirement
Watch out for paying taxes with IRA if under age 59.5, 10% early withdrawal penalty
MAGI (Modified Adjusted Gross Income) (See generally §219)Start with Adjusted Gross Income
Certain income normally excluded in added in and certain deductions are not allowed
i.e. IRA Contributions
Who May Convert2010
Anyone may convert, no income limitsMay pay the taxes over two years
½ 2011½ 2012
Mathematics of a ConversionExample
Joe has $500,000 IRA growing at 8%$500,000 of non-qualified liquid assets
growing at 6%Difference in growth rates used to reflect
lack of income taxes affecting IRA growthAge 50
Convert or no Convert???
Comparison in 2030
Conversion No Conversion Joe converts $500,000 IRA
to Roth IRA and pays the taxes with Non-IRA assetsTaxes of $225,000 state
and federal After in 2010
Roth IRA worth $500,000 growing at 8%
Liquid Assets now worth $275,000 6%
In 2030Roth IRA worth
$2,330,478Non-Qualified worth
$881,962Total is $3,212,440
Joe doesn’t convertAfter in 2010
Roth IRA worth $500,000 growing at 8%
Liquid Assets now worth $500,000 6%
In 2030Roth IRA worth
$2,330,478Non-Qualified worth
$1,603,567Total is $3,934,046
Increase reflects built in Capital Gains Tax Liability
ConversionThese are almost equal accounting for
taxesThe big deal is if taxes raise in the future,
since distributions will be taxed at a higher taxAlthough the conversion is a bust from the
IRA owners perspective if tax rates lower in the future
Comparison in 2050
Conversion Non-Conversion
IRA $10,862,260Non-Qualified
$2,828,572Total of
$13,690,833
IRA $3,777,396Non-Qualified of
$5,142,858Reinvested RMDs
(now non-qualified of $4,020,364)
Total of $12,940,620Decrease reflects
that taxes were paid on RMDs
Beneficiary 50 Year Old
Conversion Non-ConversionIRA worth $10,862,260By age 85, the
Beneficiary will have $60,097,460 in distributions
$2,828,572 in non-qualified assetsAssume all growth and
income is distributed$11,180,310 by age 85
$71,277,770 total
IRA worth $3,777,396By age 85, the
Beneficiary will have $11,494,527 in distributions
$5,695,259 in non-qualified assetsAssume all growth
and income is distributed$18,110,433 by age 85
$29,604,960 total
Bottom LineIf Conversion Occurs, Inherited Roth IRA is
far preferableIf wealthy clients have IRA or 401K that
they don’t need, and have sufficient liquid funds for conversion, they should probably do it
Roth Conversion Option 3Conversion occurs after clients deathInternal Revenue Notice 2008‐30 allows for
a Roth Conversion to occur after a clients death
Make sure the numbers workYou are using Non-Qualified Assets to pay
taxesLife Insurance???
Keep In MindFor Estate Planning Purposes:
Best Scenario is Roth Conversion during lifetime
Second Best is No ConversionRoth Conversion after Death???