Re: Conversion from Regular Non Taxed IRA to a Roth IRA

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: Conversion from Regular Non Taxed IRA to a Roth IRA
Date: Tue, 24 Mar 1998 18:36:53 -0500 (EST)

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>I am reading conflicting information as to the possibility of using a
>portion of the proceeds from an old Non Taxed IRA to pay the tax due after
>the conversion. I read that it can be done with little or no penalty vs:
>double penalty if done. Allow me to pose a scenario:

Note that using money from the IRA to pay the conversion taxes *severely*
undermines the case for converting to a Roth in the first place, tax effects
aside.  I strongly advise you to run the numbers.

>Existing IRA value $100K, owner over the age of 59 1/2, current tax bracket
>(for discussion) 20%
>
>Transfer ALL of the IRA to a New Roth IRA in 1998.
>
>Tax due ( payable over 4 years ) $20,000 ( @ $5,000 per year )

That's not how it works.  The tax isn't spread over 5 years, the income
is.  So you would add $25,000 to your *income* in each of the next four
years.  This may well push you into a high tax bracket, by the way.

>Since the money in the Roth Ira is "after tax money", withdraw 4/1/99,
>penalty free (FIFO) $5,000

Don't be too sure about this.  The Congress and the IRS knows about
the loophole of using a Roth to in effect take money penalty-free from
a traditional IRA.  The pending technical corrections bill would put
in a penalty for withdrawing any money from a Roth account funded by a
conversion from an IRA until 5 years from the date of the final
conversion into that account.  I do not know if that penalty will
apply to people over 59.5.

>Does anyone see any problem with this scenario?????

(1) From a pure financial perspective, using money from the IRA to
    pay the taxes wipes out most if not all of any advantage the
    Roth might have for you.

(2) There's a good chance that there will be a penalty for *any*
    withdrawals from a Roth account funded by a conversion within
    5 years of the conversion.

Check out www.rothira.com and the many Roth IRA threads in
misc.taxes.moderated.

Rich Carreiro
rlcarr@animato.pn.com

(Editor's Comment:  also:  http://pfinance.miningco.com  
I have a Taxes link that has a link to that site as well as much other
information about the Roth IRA. -IK)

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