Roth Conversion tax reporting problems

[Kathy]

There sure seems to be an awful lot of confusion out there about Roth IRA conversions/ Transfers. We, the custodian of a Roth IRA, sent a conversion request on behalf of one of our investors to the trustee of her traditional IRA requesting that they transfer it to us as a Roth Conversion. The form she signed clearly indicated her intention to convert the traditional to a Roth and our letter clearly indicated we would accept the transfer into a Roth IRA. However, the transferring trustee is now telling her that they will not issue a 1099-R because they are treating it as a trustee-to-trustee transfer between traditional IRAs, a transaction which is not reported to the IRS at all. They are telling her we should have transferred the money into a traditional IRA and then done the conversion for her to a Roth from there. This seems a pointless waste of time, energy and paperwork since our conversion form and acceptance letter were clear that she was requesting a distribution from her IRA with the intention of converting to the Roth (the hope being that the 1099R would show premature distribution with an known exception to the penalty). Has anyone else run into similar situations? Are there any logical explanations for this approach?

[Guest robb]

My wife and I both converted our traditional IRA's to Roth IRA's (Aug. 1998) BEFORE we got married (Sep. 1998) based upon the recommendation of our Fidelity Investments representative. Now, I am finding out in this years tax forms, that we must re-characterize these back to traditional IRA's because our combined AGI was greater than $100,000 (by a whopping $4,000 !?!).

Are my findings correct ??? I've spent over 12 hours just trying to figure out this problem with our Roth IRA's and I need another set of "eyes" to determine if this is really what I need to do or if there is another way I should tackle this problem.

Any and all help would be greatly appreciated.

Thx,

~~Robb

[BPickerCPA]

As I see it, you have two choices.

1. Recharacterization

2. Annulment

Go with choice 1!

If the Fidelity person told you that conversion prior to marriage would avoid the joint income limit, he was ignorant. It was known all along that the $100K limit was on a joint return, and that your filing status is based upon marital status as of the last day of the year.

[Guest John R Grossmann]

A suggestion: If you own a business or normally file a Sched C you should talk with your accountant about how you structure your 1040. Also look at any assumptions you used for determining the basis for capital gains. Neither of these may get your AGI below 100 but your circumstances may be unique enough. If you are almost 100% salary, you are absolutely out of luck. Write your elected officials in support of relaxing the Roth conversion income constraints. Your case is a good example of how innocent people can get screwed up. Good luck.

[Guest robb]

thx for your help with our problem.

One question though... would a single person have a max on their AGI of $50,000 or $100,000 ???

I THINK I know the answer (100K?), but wanted to hear it from someone else.

Don't tell my wife, but I think the Govt's tax laws are very unfair for marrried indivduals, especially those living in California with its higher cost of living. Who's to say that if we were living in Colorado that the same situation would then allow us to make the ROTH IRA conversion work for us since we didn't make as much in wages, but were still able to lead the same lifestyle !!!

Enough of me rambling and venting my frustrations!

Thx again for your responses!

~~Robb & Christine

[Guest John R Grossmann]

Tax laws unfair? How could you say such a thing! If I move 120 miles north to Wyoming my income tax rate drops 5%. I once considered taking a job in Mass. but discovered that they taxed capital gains, interest and dividends at 12%.

If you can't solve your 1998 problem, here is an approach for 1999. Push all discretionary income such as bonuses and capital gains to 2000. Start a business, buy a company car, computer, copier, fax, etc. Use the Sec 179 expense provisions to write off lots of $$ in 1999 which is reported as Sched C losses on page 1 of the 1040. This can reduces your AGI below 100k and allow you to do your Roth conversion. Then in 2000 put an informercial on late night explaining for $29.95 how California couples can become eligible for a conversion!

I know from experience that you can start a construction company and easily have tax losses of a quarter million in the first year while you build house #1. Option 1 is preferred.

[This message has been edited by John R Grossmann (edited 02-07-99).]