BPickerCPA

1. Yes 2. No limit, you can convert up to the entire balance in your traditional IRA accounts 3. Partial conversions are allowed 4. Yes 5. Contributions can be made up to 4/15 of the following year. Conversions must be done by 12/31 of the current year.

There is the initial question as to whether "starting a month ago" qualifies a person as a trader. But more to the point, there was a little noticed law change, I believe in the '97 tax act that affected the question of trader vs investor. I am not all that familiar with; I'm only aware it's there. Since I don't deal with day traders, I haven't had to get that involved.

John, I believe if you look at the rules for who qualifies as a "trader", Andrew will not qualify. I recall that there is some sort of election for trader status, and that deadline is passed.

Your first problem is that you overfunded the 401(k).

[[MY Statement: The 10% penalty is waived when SEPP start at age 45 and continue to age 50 when they are stopped. (They do NOT have to continue to age 59.5 in order to be relieved of the 10% penalty) ]] WRONG! If SEPP starts at age 45, they MUST continue until age 59½, or else the 10% is imposed on ALL pre age 59½ withdrawals. That's the danger of starting too early.

Art, The questions you pose assume (A) that your analysis of the situtation is correct, and that (B) your situation under analysis represents the norm. I've been trying to nicely suggest to you that it ain't necessarily so. Your statement "I was hoping his response would explain in what way his client was somewhat unique" assumes that his client IS somewhat unique. There are those of us who believe his client represents the norm. Again, that's not the issue. The issue, which you seem to ignore, is that the answer for his client was based upon data that you and I are not privy to (so I guess his client is unique, just like everybody else). You later state "But since reasonable assumptions for a similar situation show they may cost the children lots of money, I am curious what circumstances would reverse this conclusion.". This is troubling because you take a hypothetical from a specific set of facts ("MAY cost the children") and then immediately install it as a given ("reverse this CONCLUSION"). What is unique about YOUR situation (unique again being a poor word choice since every situation is unique) is that the IRA needs to be tapped for living expenses. That negates a large advantage of the Roth, that being no mandatory distributions. Obviously, who cares if you can legally leave the money untouched, if in fact you have no intention of leaving the money untouched. Change that aspect of the equation, and the result changes. But most important, stop generalizing.

This sounds like one of the essay questions that requires 3 pages in the test booklet to answer. Since I already have my degree, I'll opt out.

The answer is NO. You cannot convert a required distribution. It's clearly stated in the law. You would have to take the required distribution, and then convert the balance, if eligible.

[[i simply questioned the wisdom of MTL-CPA's client converting to a Roth because my experience is most such large conversions are seriously disadvantageous to both parents and heirs]] In the majority of cases I've dealt with, the large conversion is advantageous. Now there are a few possible reasons for our differences. One is that we've seen different cases. Another is just there is a difference of opinion. You've mentioned a specific case where you feel that the roth conversion is not appropriate. That's OK, except that you use that to question the wisdom of MTL-CPA's client converting to a Roth. Just as I don't the intimate details of your specific case, you can't know the intimate details of MTL-CPA's client's case. And that's true even if the majority of the cases are on your side. You still cannot generalize. One very important consideration in a roth conversion analysis is the fact that roth IRAs don't have mandatory lifetime distributions. But the degree of importance depends upon the client's ability and desire to leave the account untouched. This one factor alone could tilt the analysis one way or another (I know because I've done plenty of them where it has), and this factor will vary from client to client. The point is that you can't "simply question the wisdom of MTL-CPA's client converting to a Roth" because it simply isn't that simple!

Art, I have neither the time nor the inclination to duplicate your financial analysis. It looks on the surface as something isn't right, but that isn't even the point. The point you make is valid, in that there is no one right answer for every case. But you're the one who basically made a broad statement in questioning why someone would make a $2mill Roth conversion. To quote you, "What excapes me is why convering $2M to a Roth is good for either the owner of the IRA or his/her heirs." The RIGHT answer is that it may or may not be, depending on factors that we are not aware of, and will vary from taxpayer to taxpayer. No one suggested that the roth conversion was ALWAYS good. You implied that the conversion was ALWAYS bad. You use one example, that even if we concede is correct, hardly qualifies to set a general rule. The solution is that you need a case by case analysis, properly done using ALL relevant factors, to make a decision. Common sense doesn't hurt, either.

By combining his IRA into her existing IRA, she blew a tremendous opportunity to use the joint life expectancy of herself and the kids (subject to MDIB while alive) on the inherited portion. It also looks like she did not properly compute the 1998 MRD, since his life could not be used if his life was being recalculated. It APPEARS that you need to compute her distribution based upon her single recalculated life expectancy. What's worse is that when she dies, it all must come out by the end of the following year. BIG opportunity wasted.

[[The numbers showed the conversion would provide her with a Roth IRA valued at 3.2M after estate taxes if her parents died in their mid 80's while she'd net about 4.2M from the estate in equities (from the taxable account) if they stayed with the traditional IRA, or a 1M advantage for the regular IRA in FY dollars or about 500K in today's dollars. ]] Talk about playing fast and loose! You're comparing what she would get from THE ROTH ITSELF vs what she would get from the entire estate, if they didn't convert. From my reading, there is still about $3mill in a traditional IRA, plus about $1mill in the taxable account (assuming they lost 50% to income tax on the conversion) when the parents are in their 60's. WHAT HAPPENED TO THIS MONEY, BY THE TIME THEY WERE IN THEIR 80'S????? As an additional aside, I've seen many of these analyses that use the same after tax rate of return for the IRAs and for the taxable account, which is a glaring error. Go over your numbers again. There is $2mill in a taxable account if you don't convert. There is $2mill in a Roth IRA if you do convert. How can the $2mill in the taxable account be worth $1mill more net of estate taxes at death? Can someone tell me what's wrong with this picture????

All trades within any type of IRA is ignored, whether it results in a gain or a loss.

I will agree with jlf's summary, but let me phrase it differently. If you are avoiding the pre 59½ penalty with SEPP, the life expectancy sets THE distributions; no more, no less. After 70½ the life expectancy sets the MINIMUM that must be withdrawn. If you want more, you're welcome to it.

You have to pay income tax on the IRA withdrawn to pay the estate taxes. However there is an itemized deduction available for the estate taxes attributable to the IRA, which can be taken to offset the taxable income of the IRA withdrawal. Ask the attorney or accountant who handled the estate to give you the numbers you need.

Any IRA for a minor would be set up as a custodial account, so I don't think your reason is valid.

[[to the CPA: Are you saying that from 59.5 to age 70.5 one MUST use life expectancy tables and only AFTER reaching 70.5 does he have the option of using a period of time that is less than his life expectancy? (Do you agree with my age 60 example?)]] From 59½ to 70½ you can do whatever the heck you want. If at the time you reach 59½ you are taking substantially equal periodic payments, those payments must continue for 5 years without modification. Once the five years are up, or if you're not taking SEPP as soon as you hit 59½, you have the option of taking none or all or anything in between. It's not until you hit 70½ that you MUST start taking. So your age 60 example is meaningless.

From publication 590: "Annuity. You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. See Figuring the Minimum Distribution, later, for one IRS-approved distribution method, generally referred to as the "life expectancy method." Unlike for minimum distribution purposes, this method, when used for this purpose, results in the exact amount required, not the minimum amount." As you can see, it also uses life expectancy or joint life expectancy. It does NOT give you the choice to pick a term certain. At age 70½ you can pick any term you want as long as it is LESS than the life expectancy or joint life expectancy. However for pre 59½ substantially equal payments, it MUST be life expectancy or joint life expectancy. Your example of a 60 year makes no sense since the provision would not apply to a 60 year old.

[[to the CPA: The rule you refer to means that it may not be distributed over a period of time that is greater than life expectancy. The $$ may be distributed over any fixed period and to avoid the 10% penalty the money must be withdrawn over at least 5 years if distribution starts before age 59.5.]] Sorry but you are not reading the statute correctly. If you look at the minimum distribution rules of 401(a)(9) and the related rules for IRAs, you will see that the minimum distribution rules state that starting at age 70½ you need to take distributions over a period NOT EXCEEDING the life expectancy or joint life expectancy. However look at sec 72(t). It says "made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary". It does not say NOT EXCEEDING, it says FOR THE LIFE. If you're advising clients differently, your clients may find themselves with unanticipated penalties.

I suspect that converting only part of the account would negate the SEPP. If you already have ten years of payments, I doubt the penalty would be worth. But you'd have to run the numbers to know.

[[i disagree with the CPA: The account balance may be liquidated over a period of time not shorter than five years. ]] You're entitled to disagree. You just happen to be incorrect. From sec 72(t): (exceptions to the 10% penalty) "(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary," [This message has been edited by Dave Baker (edited 12-10-1999).]

[[barry--Would my plan work better if I split the 10 stocks that make up the $5,000,000 into 10 Roth IRAs? I believe that allows me to pick and choose which Roth IRAs to keep and which to recharacterize back to the traditional IRA? Is this correct?]] According to the way the regs are written, your plan would work if you used 10 different IRAs. But keep in mind that if your behavior is so outragious, you run the risk of the IRS arguing substance over form. It's your call, or you can go for a ruling.

If you convert an IRA that you are taking SEPP from, you must continue taking the payments from the Roth IRA after the conversion. If you take the $33k from the traditional IRA BEFORE the conversion, it will count towards the $100K. I can see no reason why you cannot convert and then take the $33K from the Roth, to avoid this problem. However if you convert an IRA that you're taking SEPP from, you must convert the entire IRA. So no piecemeal conversions of that account. If you have other IRAs, you can convert those as you wish, subject to the income limitation.

[[i was wondering whether the FY2000 bugdet recently signed by the President has any of the conversion and contribution limit changes proposed by Sen. Roth]] Nope.

I don't if your plan will work the way you want. If you convert $5mill and then want to recharacterize 60% of it, you will have to recharacterize 60% of the value at the time you recharacterize. So if the account grows to $6Mill, you will have to move $3.6mill of assets back to traditional IRA to cancel out $3mill of conversion income.