Taxes on converted IRA

[Guest KATE]

I converted my IRA to a Roth IRA in 1998. My accountant is telling us that we have to pay the penalty tax this year. I understood that I could spread it for 4 years. Our joint income was $137,000. Our income was high this year because my husand earned an extra $7,000 that we will not see in 1999. Is my accountant right and we have to pay the taxes this year or should we spread it out over 4 years? Thanks

[Kathy]

Your message raises some interesting questions. First of all, if the MAGI on your 1998 tax return is over $100,000 then you were not eligible to convert to a Roth IRA in 1998. If you are married but file a separate tax return, you were not eligible to convert to a Roth IRA. If either of these is the case, you can "recharacterize" your conversion back to a traditional IRA as long as you do it by your tax-return due date (plus extensions). This means that it as if the conversion never happened and life goes on happily with a traditional IRA growing on a tax-deferred basis. Just talk to the current Trustee/Custodian of your Roth about how to do this.

If I have misunderstood your numbers and you were eligible to convert, you should not owe a 10% premature distribution penalty on any traditional IRA money that was converted to a Roth, only that which didn't make it into the Roth. (like, if you kept some of it in cash to pay the taxes)

If you qualified for the Roth conversion in 1998 and you took the traditional IRA distribution in 1998 and that money was converted to a Roth within 60 days of the distribution, you should be able to split the taxable amount into 4 equal parts and include one fourth in your taxable income for 1998 and one fourth in each of the 3 subsequent years.

If you are concerned about being underwithheld for 1998, make sure you look back to your prior year's tax bill and see if what you had withheld for 1998 would have covered what you owed for 1997. If that's the case, then you shouldn't owe a penalty for being underwithheld in 1998 (although it will be a problem for you going forward for the next 3 years.)

I guess we need some clarification of your question.

[Guest KATE]

I was never asked if my MAGI was going to be over $100,000 when I converted to a Roth, even though I had lenghty conversations with the Trustee (which is a Fidelity account). So are you saying that I can't convert at all to a ROTH?

[Kathy]

That is correct. If the modified adjusted gross income on your joint form 1040 (or single form 1040 if you are not married) is greater than $100,000 for a particular year, you are not eligible to convert any of your traditional IRA to a Roth IRA. I know for a fact that this is clearly stated in Fidelity's literature as well as that of most other fund companies. Since it is really a tax issue and not an investment issue, it doesn't surprise me that they might not ask you if you have determined that you are eligible to open the account you are opening.

However, fortunately for you, there is an out. You simply call Fidelity and ask for a Recharacterization form or find it on their web site at: http://personal341.fidelity.com/retirement...pdf/crechar.pdf

This must be done by your tax-return due date plus extensions.

[Guest KATE]

Thank you. Not what I wanted to hear, but thank you.

[Guest dusty88]

dee message #6 on OZZY board just above this thread on the list. thanks.

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dusty

[Guest dusty88]

see message #6 on OZZY board just above this thread on the list. thanks.

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dusty

[Guest dusty88]

see message #6 on OZZY board just above this thread on the list. thanks.

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dusty