Will conv. to Roth help AMT?

[Guest Janly]

With current company incentive stock options I'm holding, I expect to have to pay AMT every year for the next 8 years (even spreading them out!). Does it make a lot of sense to convert some IRA money to Roth which will increase my income and reduce my AMT? I think this effectively saves me taxes...true???

[Guest Harry O]

The one rule I've learned over the years about taxes is to *never* generalize about AMT!! There is simply no substitute for putting pencil to paper and crunching the numbers. What appears obvious is often proven incorrect in the AMT world.

Without a lot more knowledge about your situation, its hard to offer any meaningful insights. Obviously, converting to a Roth will increase your regular taxes and may have the effect of kicking you out of the AMT. The perfect course of action would be to convert just enough of your IRA each year so that your regular tax and AMT are identical.

However, your AMT issue is a relatively short-term problem (your AMT credits will hopefully begin to reduce your regular tax when you begin to sell your ISO shares or in Year 9 when your no longer exercising ISOs); your Roth conversion is a longer-term problem. It generally doesn't pay to convert to a Roth unless you can pay the conversion tax with non-IRA funds or you expect to be in a higher tax bracket at retirement. IMHO, you should first make sure you are economically ahead by converting to a Roth (ignoring your AMT for the time being). If so, go ahead. The AMT savings will be icing on the cake.

Remember that AMT is generally just a prepayment of the tax you will eventually owe when you sell your ISO stock. Thus, in general, your AMT cost is the time value loss of prepaying this tax. You should take this cost into account when determining the after-tax advantage of a Roth conversion vs. no conversion.

You might want to consider dropping a few bucks on a qualified financial planner to help you with this. This is generally not a "do-it-yourself" project!