Tradional IRA to Roth IRA

[Guest jschweitzer]

I have a tradional IRA - since 1986. I have invested $32,000 ($2,000 per year). Because my AGI was too high, most of those years I have paid taxes on approximately $28,000 (Form 8606) of that investment. The money is in mutual fund and is currently valued at about $53,000. The new tax laws now make it possible to invest $3,500 per year (I am over 50), but I want to move to a Roth IRA. I have heard that I can do this in pieces (years) - move some in each of, possibly, a 4 year period, so that I would not have an extreme tax liability in any one year. I would like to move, at least the $28,000 which I have already paid taxes on, this year and be able to invest this year's minies in the new Roth. That would still leave about $25K in the tradional IRA. I could also add $5K this year, and then move the remaining $20K over the next 3 years. Can I do this? Thanks

[Mary Kay Foss]

Unfortunately you cannot choose which IRA funds are treated as being contributed to the Roth. Even if you had isolated that $28,000 separately, the calculation requires that all IRA funds be considered when determining how much of the Roth conversion is taxable. The calculation is made on Form 8606.

The conversion may still be a good idea, you just can't manage the timing of the tax consequences.

[John G]

If you qualify for a Roth, you and your spouse can put new funds into the Roth... $3500 each if you are both over 50 and otherwise qualify on income/tax filing status.

You can do a multi-year IRA to Roth conversion, but you must meet the income qualifations each year. The above comment is correct in that you use the "composite" picture of your assets and therefore about 1/2 of the amount converted would not be taxed. You can't cherry pick the conversion. Of course, if you do a multi year conversion, your assets are likely to grow... so taxes could change. You have to make some guesses as to eligibility, tax rates, portfolio growth. The multi-year conversion gives you some ability to control the timing of your tax liability and to avoid any serious tax bracket creep.

Do not undertake any conversion if you can not pay the taxes with assets outside the IRA.