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1999 Conversion to Roth IRA and contribution to 1999 Reg. Roth IRA


Guest Loxielady
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Guest Loxielady

I converted my Regular IRA to a Roth Conversion IRA in 1999 in the amount of $109,627. I have 1999 earned income of $92,818. My accountant says that I am now ineligable to contribute to a 1999 Regular Roth IRA, because I have gone over the income limit. Unfortunately I already funded the 1999 Reg. Roth IRA in 2/99. He says that I have to take it out and pay taxes on its earned income and 10% penalty because I am only 53 years old.

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Guest Loxielady

I forgot to list my 3 questions concerning this topic.

1.) Does the converted amount count toward my income level to disqualify me?

2.) Is it true that I cannot have a Reg. Roth IRA for 1999 then?

3.)If I do not qualify to have a 1999 Reg. Roth IRA, do I have to pay a penalty since I did not know until I got my accountant to finish my 1999 taxes that my income level would be too high?

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Guest Art E

Loxielady -

I can't answer you detail ?s, but there are some experts who kindly support this board the can and likely will. However, I'm always curious why people convert.

So I ask, what prompted you convert to a Roth in 1999? Did you or someone do an analyis to compare the possible differences between converting and not converting?

For some, converting is indeed advantageous; for others, converting to a Roth may be a seriously inappropriate move. And if your conversion was disadvantageous to you and/or your heirs, you still may have a few days to recharacterize it back to a traditional IRA - less any improper contributions in 1999.

Art

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If you are single, you qualify for a Roth if adjusted gross income is less than 95,000 and you partially qualify if your income is between 95,000 and 110,000.

If you are married filing jointly, then you qualify until you hit an adjusted gross income range of $150,000 to 160,000 where your eligibility phases out.

Married filing separately is probably a non starter because of income restrictions.

Does converted income count toward income levels? I found a paragraph in the Gary Lesser article at www.rothira.com as follows:

"Conversion amount not considered, for purposes of applying the $100,000 AGI limit on IRA conversions to Roth IRAs and for determining AGI-based Roth IRA contribution phase-outs, the conversion amount (to the extent otherwise includable in AGI) is NOT {my emphasis} taken into account in computing AGI." page 155, column 1, from the Journal of Taxation of Employee Benefits vol 6 number 4

Look for a confirmation from one of the accountants that this is the correct interp for your Q1, but it appears that your accountant is making a mistake.

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Conversion income does NOT count towards the income limitation.

Makes me wonder what other mistakes are being made on your return.

------------------

Barry Picker, CPA/PFS, CFP

New York, NY

Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

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Guest Loxielady

I want to thank B. Picker, John G. and Art E. for their posts. You all were wonderful to give me such expert advice and so quickly. I faxed my accountant today the specific reference that John G. wrote about from the Journal of Taxation of Employee Benefits. He will call me tomorrow. I printed G. Lesser's article. Is that Journal available on the internet somewhere, so I could get a print-out of that page? Is there another IRS or expert reference that you know of as a back-up opinion? I have found that these Roth IRA rules have a lot of accountants confused in our town. I have had to do a lot of my own research just to make my conversion. By the way I omitted that I am 53 yrs. old, married filing jointly. Our 1999 earned income was $92,818, (after deductions), with a $109,627 conversion, which equals $202,445 A.G.I. (These amts. are final)

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Guest Loxielady

Art E, you asked why I converted my IRA in 1999 to a Roth IRA. Long story, but first I did an analysis and estate planning research, which convinced me that it was right for us. There were many reasons, but the most important was passing it on to our 2 daughters and then being able to take $109,000 now and grow it tax free. If I thought that it would only grow 8-12% a year I would have left it, but since I have taken over our finances, my returns are from 25-50%, because of the good economy and market. I felt that this was a window of opportunity that I could concentrate on our investments and increase their value significantly. By the way, I am not a daytrader. I just spend much more time on our investments, stocks, than I was able to before. We are not retiring for over 10 years and have an engineering firm, which will provide income as long as we wish. I also asked my accountant this one question. If this account was worth $300,000 in 10 years, would it have been the right thing to convert it? He said yes. The reason I converted in 1999, instead of 1998 is because I goofed on the income level to qualify. I thought it was $150,000-$160,000 instead of $100,000. We worked hard to get under the income limit this year. Thanks for the help. Loxielady

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Dear Loxie,

I understand your plan. Just one comment, please do not assume a 25-50% annual rate of return is normal. The last few years have been jacked up far above normal.

There is a significant arguement among professions about a long term target return. The balanced or conservative portfolio guys that own both bonds and stocks suggest 8 to 10%. The folks totally committed to equities and especially growth stocks suggest the mid-teens. I know of no one who even remotely suggests planning based upon a 20% annual return.

I have collected data on about 30 stock mutual funds that have operated from minimum of 20 years to as long as 75 years. After you drop the top and bottom 25% performers, the average annual rates of return fall in the 11 to 16% range.

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Guest Loxielady

I understand your concern. We are not counting on that high a return. Our real estimates are in the 8-10% range. We have just been fortunate to get those returns since 1/99, and are counting our blessings. We cannot see that kind of growth continuing either, but I am happy to get it now. We are very conservative people, who do a lot of saving and squirreling away with every possible vehicle we can. This is not our only pension source. We have an engineering company, which provides a pension, plus we are running that business as long as we want to get the income. All of our other investments and pension plans require mandatory withdrawals or payment of taxes upon distribution. My only worries about converting our IRAs to a Roth IRA are questions that my accountant asked. How do you know that the gov't won't go back on its word and tax these accounts, because of lack of participation. They are not very popular. What if the gov't. doesn't exempt them from Social Security. How do I know that my tax rate won't be less later. I do not know the answers to those questions. All I can do is plan now the best I can. We would like to not use this money in our retirement. Just use the interest it earns to suppliment our retirement. Not touch the principle. Thanks for your help. I wish you lived in our area so I could hire you.

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quote:

Originally posted by Loxielady:

...questions that my accountant asked. How do you know that the gov't won't go back on its word and tax these accounts, because of lack of participation. They are not very popular. What if the gov't. doesn't exempt them from Social Security. How do I know that my tax rate won't be less later.... All I can do is plan now the best I can.

Your accountant asks valid questions to which no one knows the answers. But here is my take. The number of Roths are in the multi-million and growing so I do not understand about the "popularity" reference. Perhaps your accountant was refering to Roth conversions which have had lower numbers due to the income thresolds and up front tax payment.

Since you live in Florida, you know how big an influence senior citizens are on public policy such as SSN. Well it is just a matter of time before the Roth participants start wielding that influence. Will there be changes? Sure, there already have been and will be more. But on the key attributes, I doubt if any politician would want to go on record for reneging on the original rules. I would assume that early participants would be grandfathered. Can you imagine the back lash if the government told Roth converters they had to pay taxes twice? They have enough problem convincing people to pay taxes once. So, there is some safety in the growing numbers, especially with well educated and more likely to vote group (aka Roth owners).

Second point, I think there is a very slow general policy creep towards the idea of self funded retirement income. Witness the talk of privatizing SS. No one really wants to make a wholesale change in the system but at the edges things are changing. Roths are part of that movement. I would call it an un-named movement that has no single leader or blueprint. You can't move towards restructuring the "entitlement" without providing alternatives.

Future tax rates? Good question. My view is that many successful folks who are worried about this issue are on track for accumulating very large assets in 401, 403, Keogh, and IRA/Roths. It is not uncommon to see or expect to see a million or more in retirement assets. I have a hard time imagining these households getting taxed at a lower rate (unless the bulk of their income is in tax exempt bonds and Roth earnings). A large number of future retirees will be able to draw 80+K a year in perpetuity. I know my sample is skewed, but probably similiar to many of the people who read this board. The more successful a household becomes, the less likely they could move down in tax bracket. {As a point of reference: the number of millionaire households is expected to jump to over 13 million by 2010 according to some articles I have recently read.}

Direct future attack on Roths is not as likely as indirect attack such as via SS and alt minimum tax.

You last line is very valid. If you waited for certainty before you acted, you would be perpetually paralized.

[This message has been edited by John G (edited 04-09-2000).]

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Guest Loxielady

Good ending to my story. I spoke with my accountant this weekend and he had looked up the references and you all are right on. In explaining his error, he stated that when he entered my 1040 financial data into his Intuit software, it came back with a penalty for me and excise tax on this transaction. He said that he uses software from Intuit, which was formerly known as TurboTax. Later known as Pro? Not their commercial software, but personal. He said that the software did not recognize the Roth Conversion amt. deduction from the Modified Adj. Gross Income, so it calculated a penalty for me. I also know he didn't investigate the problem though, just called me and said I couldn't do it. He did admit that he did not know the conversion amt. was to be deducted from my AGI for my 1999 Roth Contribution. That's the problem with these Roth's. No real expertise in my Jupiter area. You have to investigate and prove everything yourself. My accountant said that he will call Intuit and tell them of the glitch. Have you heard of this or is he just making up an excuse. Anyway, thanks to all for the excellant help and the time you took with my problem. I feel fortunate to have the assistance of such qualified professionals. Kathleen

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Loxie:

If your accountant is telling you that TurboTax is incorrectly including the amount distributed from a regular IRA, but converted to a Roth, in the AGI, and, as a result, disallowing the conversion, he hasn't read the TurboTax instructions.

The user enters the IRA distribution on a replica 1099-R. On page two of that form, line C shows the amount eligible for conversion to a Roth. The box beneath (box D), is checked when you've converted the entire amount. When you've converted less than the entire distribution, you enter the amount converted on line E.

TurboTax will NOT add that converted amount into the Modified AGI which determines Roth conversion eligibility. That can be verified by looking at the 1099-R Report, Line 26 (Modified Adjusted Gross Income). That entry does NOT include the conversion.

I hate to sound harsh, but are you sure your accountant knows what he's doing? First, the rule that IRA distributions converted to Roth don't count as part of Modified AGI for eligibility purposes is something anyone who does any tax work ought to know. Second, the TurboTax instructions, while not exactly crystal clear, are not all that hard to decipher. The 1099-R replica says it all.

------------------

John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

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Seems kind of underhanded for the accountant to blame a clear cut mistake in HIS KNOWLEDGE on a software package. You are paying for the accountants experience and knowledge, not a software package.

If he is using a package, he is supposed to be trained. Apparently he does not really know the software.

Time to find another accountant. And be sure to dispute a second run at your taxes based upon his mistakes.

{BPicker, see what I mean about the value of an accountant that clearly tells you what he knows and what he does not. This is a good example. The lady clearly expected him to know the rules and he was at best "shakey".}

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Guest Martin Silfen

It sounds like Loxielady's (and her accountant's) problems have been solved...but maybe they haven't. In her third message Loxielady says "Our 1999 earned income was $92,818, (after deductions)." While it's true that her $109,000 conversion would not increase her 1999 modified AGI for purposes of qualifying for either the conversion or the 1999 $2000 regular Roth contribution, it's also true that most "deductions" (Loxielady's word) don't reduce modified AGI for these purposes. For example, if she had $105,000 of modified AGI before the conversion but reduced her "taxable income" to $98,000 with charitable and mortgage interest deductions, she would not qualify for the conversion in 1999. (On the other hand, business deductions against her engineering income would reduce modified AGI.) Perhaps the software was alerting the accountant (who doesn't sound too expert) to this problem, but he either misunderstood the problem or miscommunicated it to Loxielady.

------------------

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Guest Loxielady

I want to thank everyone for their responses. I was away for a few days and did not respond promptly. I have listened to your responses and I am looking for a new accountant. I think enough has been pointed out, that shows at best my accountant is not up on things. I also like people to admit when they are wrong, because if you can't, then I can't trust anything you say. I also want to respond that we kept our earned income at $95,000 and after deductions it was $92,818. Is that ok? The hardest part of the whole year was getting our income down under $100,000. I tax planned all year, because we have other investments. As a business owner you know that you must claim % of cars, meals, life insur., which your company paid for, but which are really personal beyond certain limits. I'm glad I only had to do this for one year. I definately think they should raise the $100,000 limit, because it is much too low. Thanks again to everyone for your concern and advice.

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Guest Loxielady

I'm coming to you again with a question. My oldest daughter, has been living in Singapore for 2 years (US Citizen working abroad)and she would like to contribute $2,000 to a Roth IRA for 1999. She had $84,848 earned income.(She is paid in Singapore dollars, but I have already made the conversion). She will get a $70,000 tax exemption, for being a citizen working abroad and credit for the Singapore taxes she paid of approx. $15,000. Is she eligable for a Roth IRA for 1999? Thanks again.

[This message has been edited by Loxielady (edited 04-13-2000).]

[This message has been edited by Loxielady (edited 04-13-2000).]

[This message has been edited by Loxielady (edited 04-13-2000).]

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Guest Loxielady

I need to add some background on my daughter, so you can make a proper assessment. She is single, born USA citizen, working as a consultant for the last 2 years for a Singapore company. The Singapore company is a subsidary company to her London based parent company. They pay her in Singapore dollars and provide her with salary and a housing allowance. I have included the housing allowance in her income. She claims permanent residence in Florida. Except for this Singapore stay, she has always lived in the USA.

[This message has been edited by Loxielady (edited 04-13-2000).]

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I am a little confused about the 95K income issue. A Roth conversion is based upon MAGI, so it is essentially the front page 1040 AGI you are looking at, not the after deductions part. Your eligibility may evaporate if your numbers change. Things that my affect your MAGI would include K1 items from a business, partnership income, capital gains from mutual funds, state tax refund, etc. Depending upon how your business income/expenses are reported, they may end up on page 1 or not. Since you are close to the boundary, you need an accountant to make sure you qualify and the paperwork is done correctly.

I would recommend that you file an extension, and wait until the April 17 rush blows over to get this all worked out.... new accountant and all.

[This message has been edited by John G (edited 04-13-2000).]

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Loxielady,

Since your daughter's earned income exceeds the exclusion, she has earned income that qualifies her to make a roth contribution, PROVIDED that her total income IGNORING THE EXCLUSION is not over the limit.

------------------

Barry Picker, CPA/PFS, CFP

New York, NY

Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

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Guest Loxielady

Mr. Picker,

Thank you for your response. Are there different income phase out levels for single filers? Is it the $150,000 to $160,000 as is the joint married or is it something else?

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