Contribution vs. Conversion Rules

[Guest jc7032]

My AGI for 1999 will put me in a situation of a limited contribution to a Roth for 1999. However, my AGI will be less than the limit to do a conversion of my non-deductible IRA to a roth. If I make a $2,000 contribution for 1999 to my non-deductible IRA, then convert the account to a Roth, in effect I made a $2000 contribution in 1999 to a Roth. Is this ok by the rules? Thanks, in advance with any help with this question.

[John G]

Please specify marital status and rough AGI number. The requirements for new Roth are not the same as existing IRA conversion. Note, there have been proposals to change the income thresholds (recently vetoed), so the rules may change again.

[Guest jc7032]

Marital status is single. Approx. AGI for 1999 will be 95 to 97K. The roth account will start as a conversion from an existing non-deductible IRA. I also plan on converting a rollover IRA into the roth before the end of the year. Assuming I am not violating any rules I plan on contributing $2,000 to the non-deductible IRA for 1999 prior to the conversion to a roth.

Thanks for any advice.

[John G]

From the Rothira.com site:

Not everyone is eligible to make a contribution to a Roth IRA..... maximum income cap for taxpayers to be eligible to make a Roth IRA contribution. For single taxpayers, the ability to fund the Roth IRA starts to PHASE OUT (my emphasis) at $95K of MAGI and disappears completely at $110K.

Taxpayers who have existing traditional IRA accounts may be eligible to convert their accounts into Roth IRA accounts. The requirements are that the modified adjustment gross income not exceed $100K.... For taxpayers who desire to convert to a Roth, and whose income is close to the threshold, certain steps can be taken to reduce their MAGI. Among the steps are to move money in interest bearing accounts into either tax free bonds, or Treasury bills that will be taxed in 1999 (Treasury bill interest is taxed at the bill’s maturity, even though it is paid up front). Don’t worry about paying a penalty if you break a Certificate of Deposit, as the penalty will reduce MAGI. Taking capital losses will also help, particularly if you have capital gains. [but the max Sched D net tax loss is $3,000 in one year] Also useful is putting money into 401(k)’s, 403(B)’s, Keoghs, SEPs and SIMPLEs, to the extent that you are eligible. But putting money into an IRA will not help.....

end of extract

And I will add one more idea, you can start a business and write off investments in the firm via sec 179 expense and that reduces your AGI. [unlike capital gains, the $3K limit does not apply to valid business tax losses] So you have atleast two options to wiggle under the thresholds.

Making a regular contribution, then converting it to a Roth seems to meet the rules. I guess that makes sense if you fall into the near 100K income area. I have never seen it proposed before, but it looks like there are loopholes caused by the arbitrary income thresholds. I hope others will add to these comments.

[ above comments clarified per next comment, my apologies for sloppy text ]

[This message has been edited by John G (edited 11-18-1999).]

[Guest mcdonnell]

The max tax loss in one year from operating a business is not limited to $3,000. The loss is limited to the investment at risk in the activity. $3,000 is the limit on a loss from the sale of a capital asset.

[Guest John R]

I was wondering whether the FY2000 bugdet recently signed by the President has any of the conversion and contribution limit changes proposed by Sen. Roth.

[BPickerCPA]

[[i was wondering whether the FY2000 bugdet recently signed by the President has any of the conversion and contribution limit changes proposed by Sen. Roth]]

Nope.

[Guest jsexton9]

From what I have read, the IRS has rescinded the ruling that separate accounts must be established for Roth conversions and contributory Roths. My investment company requires otherwise: separate accounts for conversions made in different years, AND a separate account for a contributory Roth. Can anyone tell me what the latest IRS ruling is on this matter?

[John G]

Separate accounts are not needed. Buck your question up atleast one level with your custodian. If they still resist, you can always transfer your assets to another firm. You might want to remind your current custodian of that option.