My husband has recently become disabled, and lost his job. He was our only source of income, I don't work. Now his job wants him to take out his traditional 410K. Which is 14,400. So I quickly opened an online account and had the money transfered. Now I am wondering if I should Convert it to a Roth IRA? But am wondering how this would affect us tax wise. The IRA calculator says we would owe about 3800.00 in taxes on it. Now how does this all work? Does the 14,400 get added as income on our 2007 tax returns? Or does the 3800.00 tax have to be paid immediatly? And if it does get added as income on our 2007 returns, being that our only income for the year would be my husbands SSI Checks, which add up to about 10,000 for the year + the 14,400 for the IRA conversion, that would make our AGI 24,400. That said, The SSI would not be taxed because the AGI is less than 36,000, SSI says. So that would leave the taxable 14,400. Now last years returns gave us a standard deduction of 16,900, and if the same goes for 2007, that would wipe out any tax we would owe,Being that the standard deduction is more than our AGI, RIGHT? Not only that, but we should get a refund because I have 15% tax taken out of his SSI check. And we would get all that back. Am I right to think that this would be the perfect time to do this conversion, being we would not end up paying any tax on it? Or am I figuring this all wrong? HELP! I'd like to know BEFORE converting because right now we cannot afford $3800.00. We are married and file jointly every year, are homeowners, no children. and our only deductables being property taxes, medical, charities, no mortgage, no work expenses, are less than the standard deduction, so of course we take the standard. Just need to know if Im right, so I can take advantage of the Roth conversion tax free? Thanks, any info would be greatly appreciated!

I was hoping , Mare , that someone here much more qualified than I am , would give you their opinion . But , since I don't see anyone posting yet , I'll give ya my two cents worth .

I am a very big fan of Roths and have done quite a few very large Roth conversions in the past and intend to do more in the future , HOWEVER , in your case I don't think a Roth conversion is a good idea for you . Usually Roths are excellent for those in a higher income tax bracket in their retirement , or with large deferred accounts that'll require large RMDs later . Or those with plenty of extra spare cash to pay the tax bill on those Roth conversions .

In your case , the $3,800 tax bill that would be due on your Roth conversion is a lot of money to you with your present household situation . My suggestion is to NOT worry about doing a Roth conversion now . If you do decide to change your mind later this calendar tax year , you have until December 31st of this year ( 2007 ) to make that conversion and still be able to include it in this year's tax return next spring . And IF you could convert WITHOUT paying a very large tax bill , then you might consider it later this year .

I'm sure you'll be hearing from others here , Mare , so please check back later . And thanks for sharing the full extent of your personal life's circumstances with us here . It did help me to forge my answer . Good luck and let us know what you decide to do and please include us in your future investment decisions .

Thanks for answering, no one seems to know anything, Im going to wait like you said anyway, I just rolled over to Fidelity and am still now contemplating how to allocate the assets, that's another one, weather to choose a 2025 freedom fund, a single fund, or a suggested bunch of mutual funds. I don't know much about all this. So Im trying to get as much info as possible before I do anything. One day at a time, like you said I have till the end of the year. But I am mostly curious about the Tax part. If Im guessing right, I could convert to a roth and not pay any taxes on it being we are not earning anything this year. Then some day it will be tax free. Only thing I think without any earned income, I will not be able to make any contributions. Well lets see what anyone else has to say about all this, it's only February! Thanks again.

I agree with you , Mare , IF you can convert your deferred account to a Roth WITHOUT paying any or very little taxes , I'm in total agreement with you about going ahead with the Roth conversion .

I have accounts with Fidelity and have been happy with them . Perhaps you can bring their knowledge to bear on your Roth conversion decision . ? ? Because of the low amount of your account , I would look to a single mutual fund for your future selection . In the meanwhile , their money market is fine for now .

Good luck and let us know what you decide . It'll help others here too that read your story .

I am not familiar with the tax treatment of disability income and would advise looking for a local person for specific tax advice. (try your church or look for any taxpayer assistance offered by the local CPAs) It is often a good idea to do a CONVERSION to a Roth in a year of very low income, which sounds like your 2007. That is a long term strategy if you have the other bases covered and have ample assets.

I think your scenario is incomplete. Do you have any cash reserves? Will you need to tap into these assets in an emergency? Are you (or your husband) expecting to go back to work at some time? What do you think will be your income in 2008 and beyond? What are your ages? Are these assets your primary retirement funds or do you have other accounts? (you mentioned accounts a Fidelity)

Perhaps some of our accountants can comment on the rules governing access to either IRA or Roths for persons with a disability.

Cash reserves, whats that? No we have maybe 1000.00 in a savings account, but we do own our home outright, and we own two other investment properties worth maybe 100,000. our primary home is worth about 159.000. My husband is only 44 and I am 47. It does not look like he will be returning to work any time soon. He suffered a trumatic brain injury. And we are now living on his SSDI which is after the 15% tax I have them withhold, 794.00 a month. I rolled over his 401K to fidelity online, and they are now waiting for me to allocate these funds. And Im still contemplating weather to convert it into a roth seeing as how we have no income this year, barely 10,000 which will be tax free according to SS. So that leaves the IRA, 14,404. and after the standard deduction for married filing jointly of 16900, I figure any tax due would be wiped out, and instead I should even get a refund of the tax they took out of his SS Payments! All I want to know is if I am guessing Right before I convert this IRA? If so, then there is the question of how to allocate these Roth funds? A 2025 Freedon fund? Mutual Funds? A Single Fidelity management Fund? I don't know much about all this, the simplest and easiest for me would be the freedom fund cause THEY allocate the funds for you and readjust as the time you choose nears. Plus there is only a 13.00 fee for this. All I know for sure is Thank God I paid Cash for my home when I did or right now we would be in REAL trouble! And everyone I know told me not to do it! Go figure! We live in Fulton County Upstate NY. A Rural Zone, and one of the poorest counties in upstate NY. The only Bills we have are a 79.00 electric bill and a 25.00 telephone bill. We have a well for water and a septic tank. Taxes for all three properties are about 3500.00 a year. Car ins. and home are 600.00 a year, no credit card debt or anything else. So you see believe or not, we can make it on the 794.00 a month. Our ONLY REAL EXPENSE is that we both smoke! And that alone costs me 300.00 a month! I will have to find a job in the future I guess, but right now Im taking care of my husband, he really cannot be left alone cause you don't know what he'll do. He is absent minded, leaves the water running, fridge door open, things like that. We heat our home with a wood burning stove also, could you imagine letting him do that job? I don't think so, so for now Im home. No work for me, I already have a Job, My husband! Thanks for trying to help, any info is greatly appreciated, I've got all year to decide with a little help from all you guys. Thanks again soooo much.

Thanks for the additional info. You are fortunate to have low living expenses given the hit your income has taken. If you were sitting on a $1000/month mortgage, you would be definitely in a hole.

You have no mortgage payment (but I do hope you have home owner insurance) and apparently local wood for heating. No credit card or other debt - which is excellant. That leaves food, utilities, insurance, medical? and property taxes. The single best thing you could do to give you more spendable money is to ditch the cigarettes. I'm a non-smoker... I can't imagine spending about 1/3 of my monthly income on cigarettes. Wow.

You did not say anything about income from the investment properties. If there are no revenues from these properties, you might be better off selling these assets and putting those funds to work. See last paragraph.

Your only safety net funds are either the investment property or the IRA/Roth. That leaves you exposed to any problems like a car replacement, home repair or further medical costs. It is difficult to navigate many years without having some kind of surprise. Lack of reserves means you may need to liquidate your investment properties or draw from the IRA in an emergency.

I think you are correct that you can convert the IRA to a Roth... if not all in one year, then part in 2007 and part in 2008 if you find you will owe some taxes on a full conversion. BUT, the benefit of doing this may be modest. You have indicated that your income is going to be very small in the coming years and therefore your taxes (if any) will be very low. It could very well be that you have a zero and zero comparison.

SSDI Withholding

If your income is likely to remain as you have explained, there is no good reason to give Uncle Sam an interest free loan all year long. You can drop the witholding and build your "reserve".

Mutual Fund Choice

Fidelity has many solid mutual funds that you can consider. All choices would be easy to liquidate if you needed to tap these funds. The target retirement year option is ok, but understand that the industry is using these target retirement fund choices as mostly a marketing gimic to capture uncertain investors. You could also just pick one or two general purpose mutual funds and do fine. The target funds are supposed to shift slowly to more bonds as you get older. They are designed for the average households retirement timing and may not best match your specific needs.

Investment Properties

You indicated that these were worth about 100k. Assuming that you have held these for more than a year, you could sell them and perhaps have 85,000 or more to invest after taxes. If you put 1/2 in a dividend/income fund and 1/2 in a bond fund you might be able to earn about 6% a year or about $5,000. Think about how that matches up against your costs (property taxes plus ?) versus your current revenues or annual appreciation.

I Know your right about the cigarettes, it's a terrible thing, And we do have homeowners ins. As far as Health ins. thats gone with the job, but my husband should be eligible soon for medicare, but that leaves me out in the cold. food costs me like 200.00 a month, utilities are another 100.00 a month, propertie taxes are 3500.00 a year for all three. The two investment properties don't bring in anything, they just cost me taxes every year. We have owned all three for 10 years! One is a 6 acre vacant lot which does not cost much, maybe 200.00 a year,It's good for getting wood for my wood stove though. it's the other one, a 5 1/2 acre wooded lot with a log cabin my husband built on it that costs me 1500.00 a year. Do you beleive it, there is no water,no electric, no nothing, just a 20'x20' log cabin, and it costs the same as my main residence where I have water,and electric. But thats my husband baby, he would not sell that for the world, he is there more than he is home, it's about 5 miles from my house. I told him he should have built the thing in our back yard being we have another two acres here, would have been cheaper! I am considering selling the six acres though, and I am also thinking of telling SS to forget the withholding. I just did that before I knew we would not have to pay taxes on it, just to be covered. Now I know, so forget them! And as far as the allocations go, I would not cash in the IRA ever, no matter what, till it's time. I would sell my home first. But I am leaning towards the freedom fund, sounds like it was made for suckers like me! Set it and forget it. And any profit from the sale of the 6 acres I could invest like you said somewhere. Wish I could afford an investment advisor! Thanks again for your input, I value all the info i get very much. One things for sure, I better start looking for a job! Problem is where i Live the only thing around is milking cows! Closest decent paying work would be in albany, thats a 2 hour drive! Wish I could find some sort of work at home thing. But thats what everybody want isnt it! Thanks again.........Maryann

A very rural life indeed. I grew up going to VT to a "cabin" with no running water or electricity - and it was probably 12 x 15... but just for summers.

You may not need to make any hard choices right now, but may face them down the road. You have virtually no spare dollars for the unexpected expenses. And, vacant land and the "cabin" are not easily transacted quickly.

There are jobs that you can do based out of your house. First place to start is not folks who advertise home based businesses as most of these just suck up front end fees. Try networking with others at your church, local businesses, town hall, etc. Working even 12 hours a week would give you a modest cushion.

Feel free to post again or email. Good luck with your decisions.

OH Yes Very Rural, But not too bad, the closet store takes me 20 minutes by car. Im originally from New Jersey, was born and grew up there my whole life. The George Washington Bridge was in my back yard, 5 minutes away. We've been up here for 10 years now. My husband is originally from Sicily! Only been in this country 15 years. We married in 91, and both lived and worked in New Jersey. Dinks (double income no kids). But we couldnt make it. Bergen County is the most expensive county in New Jersey. Funny how we went from the most expensive to the poorest. Then one day My Grandmother passed away and left me some cash in a trust. And my husband came up here hunting with his friends and found that 6 acre lot for sale, of course he wanted it, so we bought it. It has since doubled in value though. Ever since then he was making the 3 hour drive up here every weekend and started his log cabin building project. And I never saw him, so I figured I might as well move up here if I wanted to see him. WRONG, I still never see him, he's always at that cabin! Anyhow, up here the cost of living being much cheaper, one income was enough. So being he was the one who could earn more, he got a job about an hour away with a mining co. He does everything, runs the crane, dozers,welding,trucks,everything. And we could live very nicely. Plus I bought this ranch style home with 2 car garage and two acres of land,built in 82, close to town and his cabin, with grandmas money, Cash. All was going great till his accident, He crashed on his ATV, and of course was not wearing a helmet, spent 6 months in the hospital with broken hand,fractured neck,fractured spine and the best part, trumatic brain injury! On top of all this he already had just gotten a total hip replacement, it's titanium now, Thats must be why it didnt break in the accident too! I cannot tell you what I went through, only i wouldnt wish it on my greatest enemies. Thank god he is pretty much back to normal,95%. But not enough to return to any kind of work. It's been two years now, and we have been makin it on that lousy 795 a month which I just filled out the form to stop them from taking any more taxes out of it, so now we should get 935, and they told me soon he could get medicare A for free and Medicare B will cost me 95. which they will take from his check, Oh well better the Insurance then Taxes. Next is that land, gotta get a sign: For Sale By Owner! It is nice up here though, I went from go go go go, things had to get done Yesterday, to a complete Stop, do it tommorow! Took a while to get use to, no more stress. no more lines to wait on. Have you ever been to motor vehicle and spent the whole day there just to get something done? Up here you walk in and there's no one there, all the workers argue over who is going to help you! Unbelievable, Insurance rates for your car, mine went from 1000.00 a year just for minimum liability, to 277.00 up here. It's great! The only down side is the Snow, boy oh boy, in all my years in jersey i never saw anything like this, 2 feet over night, three nights in a row! Got me one of those roof shovels and a BIG Snowblower! From September to June you gotta put wood in the Stove! My whole house is electric heat, so wood is cheaper, especially when you get it for free. ALOT of work though! Then July and August Im cutting the Lawn, 2 acres with a riding lawnmower, about three hours every week, another 2 hours of weedwacking, and an hour of hedge trimming! That's it! I should get a job Landscaping! IM REAL GOOD AT IT! 10 Years Experience! All joking aside, better sign off, as you can see i love to talk! Thanks again, Im going to look into the local jobs around here, there is alot of leathermaking places, after all this is leather country! Then I'll take up hunting and bag some deer that show up in my yard every night, after all I feed them corn every night, now they can feed me! Just Joking!!!!

Hey to all you guys out there, just wanted to let you know I just answered my own question, No, I will not have to pay any taxes on the conversion to a roth. I just finished my 2006 taxes with Turbo Tax Online, their Great! They offer a tax estimator calculator, and after entering all my info about how we are only getting 10,000 in SSI Payments, which gets wiped out because married filing jointly and earning under 32000, makes it tax free. Then putting in the 14,400 IRA, my AGI is 14,400, then they gave me a total of 17,500 in standard deductibles, and my tax liability is 0. So I was right, I could convert my traditional IRA to a Roth IRA and the 3800.00 I would have had to pay will get wiped out cause we didnt make anything this year! Cool heh? Now if I could Just figure out the best way to allocate these stupid funds! Still lookin for suggestions you guys, tell me what you think of my considering the Fidelity Freedom 2025 Plan? Looks good to me, what do you all think? I also like the 10 funds Fidelity suggests, only they only tell you to sell this and buy that, not how much % of each that to buy. I need laymans terms, with a brooklyn accent! Thanks again everyone, hope my news helps someone out there with my same problem. Now you know they can't get blood from a stone!