2010 Traditional IRA conversion to ROTH IRA

[Guest cbreez]

Facts:

Current AGI is >160K

Currently maxing out contribution limit in 401K ($15,500)

Need to rollover former 401K plans to a traditional IRA.... value in excess of $200K

Married filing jointly

Non-income spouse

Investing background is limited to 401K investing. Recent job change and promotion have created new investing opportunities

Have $1500 per month to invest beyond 401K & IRA contribution limits.

Questions:

Can new IRA be opened to transfer old 401K's and then begin transfer to ROTH in 2010 with a transfer of only a portion of traditional funds? (to limit tax liability)

Can we both contribute $4,000 each to IRA's for years 2006 through 2010 and then convert to ROTH's in 2010 and only pay taxes on earnings if we do not deduct the contributions in tax years 2006-2010?

If old 401K's are rolled into new IRA account, should separate IRA's be opened to convert to ROTH's in 2010 (ie $4,000 annual contribution x 5 years per account would mean each IRA would have $20,000 plus earnings at time of rollover)?

Advice and/or ideas welcome.

Thanks!

[txdd]

To determine the taxable amount of any withdrawal (including a Roth conversion) from a traditional IRA, you must consider ALL of an individual's traditional IRA's taken as a whole.

This means that your proposal for making non-deductible contributions until 2010 and then converting to Roth with just earnings taxable will only work if you have no IRA funded by deductible contributions or by rollover from a qualified plan.

For instance, if you have no IRA now, rollover your $200K 401k to an IRA, and contribute $20K non-deductible, your Roth conversion will be about 1/11 tax free ($20K basis/$220K total balance with no earnings) and 10/11 taxable. It doesn't matter at all whether you have one or multiple IRA's.

For a married couple, each spouse determines IRA withdrawal taxability independently by looking only at the basis, balance, and withdrawals for all traditional IRA's owned by that spouse.

[John G]

I think I agree with the above reply. Let me say it a little differently and add 2 caveates.

You don't get to cherry pick the most favorable assets to convert. All IRA assets (regardless of custodian or location) are pooled for each spouse in doing the calculations. The pooling determines the percent of all IRA assets that were tax dedubtible contributions vs non-deductible vs earnings.

The caveates:

1. Conversions are a complicate issue - both in terms of evaluating if they are "wise" and knowing that you are following the regs. Time to hire an accountant or tax professional to evaluate you idea and help you figure out what works best.

2. Do not assume that the 2010 relaxed conversion rules will stand unchanged. There are many tax oddities right now - gaps and other strange flip flops. In this area, I do expect Congress will act.