Roth conversion please help me?thx

[Guest rothnoob]

For 2004, my only income is interest and dividends, and these are not eligible compensation as defined by the irs.

my question is, can i still rollover my traditional IRA to a ROTH IRA?

since i have no eligible compensation for 2004, could it possiblely result in a failed conversion?

or is it better for me to not mess with the conversion and just withdraw from my traditional IRA and take the 10% penalty?

thank you

[Appleby]

Yes. You are eligible to convert, providing your tax filing status is not married filing separately . Lack of taxable income will not cause your conversion to 'fail'

[ElGuapo]

Can you say more about what you're trying to accomplish with the conversion? You mention taking the money out and paying the penalty, which is a very different thing from converting to Roth--which will cost you money out of pocket, in taxes at least. If you were hoping to convert to Roth and then withdraw as a means of avoiding the 10% penalty, that doesn't work. (The IRS thought of it too.) They put a 5-year limit on Roth conversions before they can be withdrawn without penalty.

[BPickerCPA]

Have you already done the conversion? If not, it's too late to do a 2004 conversion.

[Guest rothnoob]

hi every1

sry i meant 2005

my understanding is in order for me to contribute to an ira(tra/roth) i must have eligible compensation. since i am unemployed now and most likely for 2005, im certain i wont have any qualified compensation.

my question is if i rollver from my traditional IRA to my ROTH, would the IRS allow it?

to put it another way, if i rollover from traditional to ROTH does the irs treat it like a contribution to my ROTH? since my compensation is 0 which means im not eligible to make any contribution, would the irs make me rollback to my traditional.

as far as the 10% penalty, i m not trying to avoid it, i just want my money either in my ROTH or in my pocket. basically i need to get rid of my traditional ira.

thanks

[Guest muckmail]

I did a Roth Roller durring 2003 then a recharactization in

Feb 2004. I wanted to reconvert some back for my 2004 taxes

because of my low 2004 taxes. The banker told me I could

do that after end of the year 2004. I waited

after 2004 then he told me that it will go on my 2005 taxes

instead of my 2004 taxes like I want. He told me a different

story after 2005 rolled around. I lost an opertunity on my

2004 taxes. Have you found anything out about deadlines to convert??

I get a different story from the IRS people every time I call or ask

them about this subject.

thank you,

[GBurns]

You should find your answers within this:

http://www.complianceheadquarters.com/IRA/...es/1_14_05.html

[John G]

To Muckmail:

You convert during a calendar year for that calendar year. The 2004 window ended last December.

Do not expect to get accurate tax advice from you banker or broker. Start with IRS publication 590 and consult with your accountant or tax advisor before considering a conversion.

There are four big reasons for the "confusion" in answers you can receive. First, tax payers often don't use the precise terms, mixing Roth with IRA, talking about contributions instead of conversions, etc. Second, many of the "clerks" you will meet at mutual funds, brokerages and banks are not very highly trained and will often not know the tax code details. Third, answers may be accurate but come out in jargon/code whose fine points may not be understood by the person who asked the question. Fourth, the "devil's in the details" and often an incomplete explaination may leave out factors (like tax filing status, age of tax payer, citizenship, etc.) that may be very important. The combination of these four factors can be lethal.

Post your questions in this forum and you get feedback that is often triple checked for accuracy and completeness by other authors.

BUT, for all big transactions/conversions/distributions.... get the local advice of a tax professional or accountant to confirm the proceedures, timing and applicability to your specific circumstances.

[mbozek]

I am not sure of the value of conversions to Roth IRAs because of the opportunity cost of the amount of the taxes paid when componded for all years to withdrawal of funds from the Roth. In otherwords the investor has to reduce the projected gains from the roth by the amount of the taxes paid compounded by an interest factor of say 6% after taxes for a future period.

Example $5000 in taxes at 6% after tax investment return for 30 years = $28,117 in lost investment income. The IRS likes Roth conversions because it increases taxes.

[Guest muckmail]

Getting advice on conversions is very difficult to do. I found out the hard way that the conversion must be done during the year. In general finding accurate information on conversions is difficult. I was considering paying an accountant but

after asking them a few questions I found that they did not know. There was disagreement with professional accountants. I called the US goverment 800 tax number and then went down to the local tax IRA office and there was disagreement with the US goverment tax people. Its a mess. One thing I can say about missing the 2004 conversion is that I am safe and I am not taking a chance.

I did recharization in Feb of 2004. If followed that recharactication with a 2004 reconversion might have created a big headach for me since most IRS employees don't know. If I convert in 2005 the time limit of the 2004 recharacterication

should be expired for sure. One thing I learned here. Don't do a characterization

if you don't have to.

[John G]

Mbozek - - an alternative view of Roths

You are correct that Roth conversions can be a "wash" when you factor in the opportunity cost related to taxes paid on the conversion. A conversion looks better if the tax rate in the year of conversion is low. And, a conversion may be a terrible choice if you are paying max rates in the conversion year. State income taxes (at conversion or in retirement) are also a factor. Also to be considered are possible changes to Roth rules - both favorable and unfavorable. Anyone who assumes that all conversion are a slam dunk win needs to get a second opinion from a tax professional, accountant, etc. It would be extremely foolish to make any significant asset change without getting professional advice. I am amazed that someone with 250k in assets would rely on do-it-yourself conversions.

All that said.... consider this example.

A well educated couple in their late 30s rollover various corporate plans into IRAs and then using "depressed income" strategy manage to convert 200k to Roths. Since then, they have deployed these assets in a number of successful niche investments that gave an average return of 30%. The Roth assets are now around 1.2 million. They do not expect these rates of return in the future and now plan on building their Roth assets for another 25 years with a 10-12% annual return. My HP12c suggests that they should have between 13 to 20 million in this account. This is not a fantasy, but a real scenario - I know two couples that have followed this path. The high initial annual returns were based upon very astute understanding of some subsectors of the stock market on a small asset base.

Both couples anticipated being able to put their best ideas in their Roths and saw a distinct tax advantage for paying for the conversions. If they had stayed with the IRA path, they would likely be paying max tax rates on very high distributions. While we can't prove this strategy is a winner (it loses if we switch to a consumption tax), it sure looks good at this point.