I'm so Confused about Roth Conversion-Pls. Help!

[Guest jmwskw]

I have 14k in a regular IRA account which I would like to roll over into another fund family.

I understand from the new fund family that I must roll over the money into another regular IRA account to start and then if I wished could convert it to a Roth. Is this correct?

I cannot afford to pay taxes on the entire 14k to do a conversion, but can I convert only a portion of the 14k to a Roth IRA to lessen the tax hit?

Can I split my 14k into two different funds to start? Can I split the 14k to two different fund families or does it have to all go to one company (e.g. Vanguard or Janus)?

What is the type of taxes I would have to pay on a conversion? Is it 28% of the $ amount I convert since that is my tax bracket, plus 10% penalty for early withdrawal from the traditional IRA I would be taking it from?

I know this is a lot to ask, but if someone could help I'd be forever greatful for getting some correct info that makes sense to a new investor like myself. I am 30 and the Roth just seems like the way to go.

Thanks!!!

jmwskw

[Kathy]

You are not alone. There is a lot of confusion with regard to Roth IRAs and conversions - just take a look at all the questions on this message board!

First of all, although there is no requirement that you rollover or transfer your traditional IRA to another traditional IRA before you convert all or part to a Roth, you are stuck with the procedures and requirements of the Custodian who currently holds your IRA and those of the Custodian to whom you wish to transfer or rollover the money. We are all bound by Federal law, state law and the rules dictated to us by our own systems (which were created long before the exponential growth in IRA types and trasactions).

Ok, so you want to invest your IRA differently and you want to convert some, but not all to a Roth. You can do all this and more. You can set up IRAs at different Custodians and have them request a transfer of some or all of the assets in your current IRA to these new accounts - if you do a "Trustee-to-Trustee" transfer, there is no concern about how many times you do this in a year or whether or not to withhold income tax - neater and cleaner. The new Custodian/Trustee usually initiates the transfer based on paperwork you provide him.

As for conversions, if your modified adjusted gross income (on your single or joint tax return) is less than $100,000 (and you aren't married filing separately) you can choose the amount of your traditional IRA you want converted to a Roth. The amount you convert will be added to your ordinary income for the year and taxed at your marginal tax rate - keep in mind that, if the conversion is large enough, it could bump you up to the next tax bracket meaning that some of the converted amount could actually be taxed at a higher rate. There are a lot of other tax consequences you will want to consider when determining how much to convert because the conversion amount will increase your AGI, affecting your ability to take other deductions and credits.

The good news is that there is no 10% penalty applied to distributions from a traditional IRA which are properly converted to a Roth IRA.

[This message has been edited by Kathy (edited 06-04-99).]

[This message has been edited by Kathy (edited 06-04-99).]

[John G]

To add to the good advice from Kathy: Don't presume that what one person tells you about transfers is the rule at mutual funds or brokerages. Ask someone else. Roth issues are new. With all the staff turnover, it is not unussual to get conflicting advice. Ask for the retirement dept. as they should be better informed than the counter/phone staff.

I recommend that you use a direct transfer between companies where you never see a check. You can do more than one of these in a year, there is no withholding, and you can not "forget" to get the transfer done in the allowed days.

I would not recommend a lot of "splitting" since this increases your paperwork and tracking burden and may add nothing to diversification if the funds are similiar. In one block of more than $10,000 you should be able to find a home that will wave annual fees. If you break the block into pieces and use different firms, you may end up paying small annual fees.