Roth IRA Conversion

[Guest rgorman]

In a previous posting regarding the new tax law in 2005 that eliminates the 100,000 AGI threshold for doing a conversion to a ROTH IRA starting in 2010, there was the following response:

"The taxability of Roth conversions is based on the deductible/non-deductible history of ALL of an individual's IRA's. If you built up an IRA with deductible contributions in your old low-income days or you rolled over a large amount from an employer plan into an IRA, then most of the amount you convert to Roth will be taxable even if you start making non-deductible contributions now. This is true even if you keep your non-deductible IRA separate.

So for many if not most people, the new ability to Roth convert is NOT the equivalent of removing income limits on Roth contributions. Each individual's situation must still be considered to determine whether a Roth conversion is a good idea."

I can not find where the law says that you consider all of an indivudal's IRAs to determine the taxability of the Roth conversion. Can someone direct me on this? So if someone had a IRA rollover from a qualified plan of $400,000 and then did a nondeductible IRA from 2006 -2010 totaling $32,000, what are you required to look at for the taxability?

[John G]

If you are considering any kind of conversion, you need to get advice from your accountant or tax professional because much is based upon your specific details and the tax laws have changed and will change again. It's not simple. There are issues that arise due to income eligibility and filing status. Your tax advisor may also point out that you could be overstating the potential advantages of a conversion.

And there well may be a change in Congress, so don't count on 2010 rules holding for another four years. Sometimes these gaps (such as with the inheritance rules) are left open to be addressed later.

The reason you can't selectively move just part of your IRA assets is because Congress decided against letting you "cherry pick". You can read about this in Publication 590, and also at the website below. Essentially, you "combine" all of your IRA assets as if the holdings were in one location. Then you do a conversion based upon the percent or ratios related to non-deductable vs deductable contributions.

http://fairmark.com/rothira/conseq.htm