2010 Conversion

[Earl]

It is my understand that the conversion calculation includes all IRAs. You can't carve out a specific IRA as a non-deductible IRA and convert only it.

What does all IRAs mean?

I am guessing that SIMPLES and SEPs are excluded when calculating the percent of the conversion that is taxable?

Thanks

[Appleby]

SEPs and SIMPLEs are included. Therefore, all your Traditional, SEP and SIMPLE IRAs are treated as one IRA, when determining how much of the converted amount is attributed to your basis ( non-taxable balance).

Denise

[John G]

The rules governing conversions are relatively complicated and often misunderstood. Anyone contemplating a large conversion should first run it by their accountant or tax preparer. Spent a modest amount of money for good advice and make sure you execute the transaction correctly. Your advisor can also discuss with you some scenarios where the conversion is not advantageous.

If you search back in this message board files, you will find a significant number of threads devoted to misunderstandings and mistakes. Most could have been prevented by a little amount of front end advice. Some of these transactions involved very large sums of money - - and the tax/accounting advice cost would pale in comparison. Especially in comparison to making a bad decision, 10% penalties, expense/time of correcting a mistake, or the ultimate penalty of losing your tax shelter status.

PS: I am neither an accountant or tax advisor. Although I have experience with conversions dating back to 1998, I worked with my accountant extensively on planning a conversion in the initial year they were allowed.

[Earl]

Thanks, Denise

Since that guess was wrong, here is another.

I am guessing that IRAs means IRAs and not individual account plans so that 403(b)s would not count?

Great web site, too, by the way.

Earl

[Guest allancoleman]

Starting next tax year , Earl , we're supposed to be able to convert 401(k) and 403(b) funds straight from those deferred accounts to a Roth IRA without going through the traditional IRA rollover phase necessary now . In other words , if I want to convert money in my 401(k) to a Roth IRA this year , I must FIRST rollover money from my 401(k) to a traditional IRA and THEN i can convert those those funds I rolled from my 401(k) to a traditional IRA to a Roth IRA . Next year , 2008 , we're supposed to be able to skip the traditional IRA rollover step when moving money from a 401(k) / 403(b) to a Roth .

In my own circumstance that is helpful because when I roll over money from my 401(k) to a traditional IRA in the past OR do this new fangled straight transfer from a 401(k) / 403(b) to a Roth , my custodian of my own 401(k) has chosen those accounts out of my own 401(k) that the IRS will accept for this rollover or transfer . And every single 401(k) account transaction I do , my 401(k) custodian cuts me a TAXFREE check on that exact amount out of the amount I'm transfering on which I've already paid taxes , so it's nice for me . Your own 403(b) custodian might be different . ? ?

And you can convert different IRAs to Roths if you wish . I have a Schwab IRA account and a Fidelity IRA account and I rolled money from my 401(k) to both my IRAs and converted amounts in BOTH to Roths last tax year , 2006 . I also did a Roth to Roth , institute to institute , transfer last tax year . And I intend to do another Roth to Roth transfer this tax year , 2007 , too . I also intend to do another single Roth conversion this tax year too .

More information , Earl , on all these processes , can be found at :

http://www.irs.gov/pub/irs-pdf/p590.pdf

This is IRS publication 590 , or what I call the retirees bible . In case you aren't familar with IRS publications , the latest is always for the last calendar tax year or 2006 in this case . So this 2006 edition is the latest and the next 2007 edition won't be available until well into 2008 . The IRS seems to be getting later and later with their publications every tax year .

And the IRS regulations for 401(k)s and 403(b)s and other retirement plans can be found at :

http://www.irs.gov/pub/irs-pdf/p560.pdf

This is IRS publication 560 .

IRS publication 560 is 27 pages and IRS publication 590 is now 107 pages . Enjoy .

[Appleby]

Thanks, Denise

Since that guess was wrong, here is another.

I am guessing that IRAs means IRAs and not individual account plans so that 403(b)s would not count?

Great web site, too, by the way.

Earl

You are right:

403(b)s are not included. Neither are defined contribution or defined benefit plans.

Reminder: When any of an individual’s non-Roth IRAs include amounts attributable to nondeductible contribution or rollover of after-tax amounts ( basis) ,Form 8606 must be filed for any year that a distribution or conversion occurs from any of the individuals non-Roth IRAs.

PS. Thanks for the feedback .

[Appleby]

The rules governing conversions are relatively complicated and often misunderstood. Anyone contemplating a large conversion should first run it by their accountant or tax preparer. Spent a modest amount of money for good advice and make sure you execute the transaction correctly. Your advisor can also discuss with you some scenarios where the conversion is not advantageous.

If you search back in this message board files, you will find a significant number of threads devoted to misunderstandings and mistakes. Most could have been prevented by a little amount of front end advice. Some of these transactions involved very large sums of money - - and the tax/accounting advice cost would pale in comparison. Especially in comparison to making a bad decision, 10% penalties, expense/time of correcting a mistake, or the ultimate penalty of losing your tax shelter status.

So true, so true. It has gotten so bad, than some firms have had to create groups that are solely responsible for handling such mistakes and addressing such misunderstanding.

[Earl]

A Person has a traditional pre-tax IRA. Plan is to roll it to his retirement plan so that the non-deductible IRA contributions between now and 2010 can be converted to a Roth IRA and the conversion would be 100% non-deductible to Roth as he would only have post tax IRAs.

Do you think that the roll to the DC plan has to take place before the first non-deductible IRA contribution?

CPA is saying that if he makes a non-deductible IRA contribution and then rolls to the DC Plan the roll to the DC plan would be pro-rated between deductible and non-deductible amounts.

I think the plan does not allow for non-deductible contributions (doesn't say anything about non-deductible rollovers) so I think he could take the position that he is not allowed to accept the non-deductible money.

So I think the rollover to the DC plan just has to happen before 12/31/09, not before the first non-deductible contribution (4/16/07).

Any thoughts? Thanks.

[Guest allancoleman]

My thoughts , Earl , are probably NOT going to assist you in your question , but I'll give you my own exact situation and maybe that'll help you to see the extent of your own situation .

In my 401(k) , I have a " after " tax account , a " before " tax account , a " profit sharing " account , and a " company match " account . ALL these accounts have different taxing issues assigned to them . I can NOT determine which account I want my distributions or rollovers to come from when I do a transaction . My 401(k) custodian determines that automaticly for me and sends to my traditional IRA only those funds that are acceptable to them . Therefore ALL my IRAs qualify for a Roth conversion and I must pay taxes on ALL those Roth conversions . And I get a TAXFREE check whenever I make such a transaction for that portion of my 401(k) for which I've already paid taxes . And the 1099 I get from my 401(k) is very educational to read because although the 1099 will list the entire amount of the money that came from my 401(k) , it seperates out very clearly those monies for which I've already paid taxes . The 1099 I get from my IRA custodian on my Roth conversions is also very clear and accurate too . There's much more to all those little boxes and codes in that little 1099 than first meets the eye .

ALL my IRAs are " sanitized " and clean . However , I do look forward to next year when we'll be able to do Roth conversions straight from our 401(k) and skip this traditional IRA phase that's still necessary now .

And , by the way , unlike alot of our excellent people who post here , I am NOT a CPA or even a qualified person in this regard . I'm just a individual investor who has done numerous Roth conversions in the past and love'em , and expect to do many more in the future aa long as they make financial sense until all my deferred accounts are depleted .

[John G]

Earl, you need to understand that what you learn today is likely to change in future years. Right now there is a 2010 window for conversions, inheritances, etc. Both of these are oddities that are not easily associated with a general public policy. If anything, they are weird lapses probably related to hasty legislation. There will be an election in 2008, and a lot of stuff could be changed - - in many unpredictable directions. If the government needs a quick infusion of taxes, they may allow the conversion gap to stand. Other programs may be proposed. Income thresholds or other eligibility requirements may be imposed. So, while it is useful to know how the rules vary in different years, I would not, at this point, rely on all of these rules staying constant.

[Earl]

As of today for a person with pre-tax and after tax IRA who rolls money to a Qualifed Plan:

Can he rollover just the pre-tax IRA?

Or would any rollover be pro-rated between the two types of money like a conversion that he would do today?

Can a plan imposed limit on money received enable the rollover to be restricted to just pre-tax money?

I realize everything/anything can change tomorrow, next week, next year.

I look over 408 and I don't see an answer in the regs that are there today.

Thanks for any knowledge anyone might share pointing me in the right direction.

[Guest mjb]

Earl See IRS pub 590, about P 37 for taxation of distributions with after tax contributions. See P 59 or so for moving money into a Roth.

[John G]

Earl - you really need to consult with a local accountant or tax advisor because none of us can be absolutely sure you are using the correct terms for the accounts and the procedures. That is especially true if you are moving a substantial amount of money. Buy a few hours of expert time - its your protection against making a major mistake.

Generally speaking, in many circumstances you can't cherry pick what you will move, but move some fraction of the blended average. That's the pro-rata issue. There are exceptions to this when the funds are in different classes of accounts. You should get the advice of someone who can look at your documents and knows your income and filing status.

Be wary of drawing conclusions based upon a simple reading of Publication 590, because the average lay person can easily fail to understand all the details of qualifying... or simply misunderstand the terms used. That old saying "the devil lies in the details" applies here.

[Earl]

408(d)(3)(H) (once I figured out what it said) and page 23 of pub 590 answer it for me.

Thanks mjb