4-year spread w/ regard to conversion to Roth

[Guest robin s vatalaro]

Hypothetical - John converts $300,000 regular IRA to Roth IRA prior to 12/31/98. Does John report $300,000 of income on his 1998 1040, computes the additional tax due to the $300,000 income inclusion, and then spreads that tax over four years, 25% per year

OR

does he include an additional $75,000 in income during each 1998, 1999, 2000, and 2001?

My understanding from reading technical literature is that mechanically, the latter is the proper way to report. Can anyone confirm this? Thank you!

[Guest David Hammond SRS]

Hi Robin,

The correct method is to include one quarter of the income in 1998 and the following three years. It is the income that is spread over four years not the taxes.

Hope that this helps.

Dave Hammond-Sentinel Retirement Services

[Guest wallyburke]

Hi,

I'm in the process of converting my current Traditional IRA to a Roth IRA. I hope to have this done before Dec 31 so I can take advantage of the "4-year spread".

My current AGI is below 100,000. What happens if it goes above 100,000 during the "4-year spread" timeframe? Would I then have to convert some of my Roth back to a traditional or does the law only look at your AGI for 1998?

Thanks, Wally Burke

[Guest Albert Lin]

Wallyburke, the $100,000 AGI requirement appears to dictate whether you can or cannot convert a traditional IRA to a Roth IRA in 1998; I do not see any provision in the Code or recently issued proposed Roth IRA regs that require a reversal of your newly-created Roth IRA if your AGI goes up in later years.

That would be an admittedly horrible interpretation; penalizing people for making more money by reconverting the Roth IRA!!

The increased AGI may affect the ability to make further contributions but won't affect an existing Roth IRA.

I'm just starting to get familiar with these Roth issues so anyone, feel free to flame me if I'm wrong.

[Guest hobo]

AL, no need to light the match. You are correct on all counts. However, WB should note if indeed you do earn >100K+ starting next year, you may possibly may be bumped into a higher tax bracket; thus you may end paying more taxes on the future payments you elected to spread out, than if you had elected to pay all at once in 98, when you were in a lower tax bracket.

[Guest John R Grossmann]

My local IRS office has indicated that a separate IRA form is attached to your 1040 and therefore the "4yr vs all in 1998" election can be different for each spouse. This gives a couple some flexibility in what Roth conversion income to claim in 1998. For example, a couple that converts 100K (her) and 40K (him) under the four year rule would claim 35K each year for the next four years. Another option would be to put 65K (all of his 40K and 1/4 of her 100K) on their 1998 return and 25K for the following years. This might be attractive depending upon the current and future income tax rates.

[This message has been edited by John R Grossmann (edited 01-17-99).]