AGI considerations when converting from IRA to ROTH IRA

[Guest Kevin Martin]

I am hoping that someone can clarify what I need to be aware of for the rest of this calendar year to ensure that I do not exceed my maximum AGI allowed for this year.

I am a single, 38 year old male and am under the impression that the maximum amount that one can earn during calendar year 2000 is $100,000 (AGI) in order to be able to transfer to a Roth IRA without having to recharictarize afterwards.

I converted approx. 17k from my 401k to a traditional IRA earlier this year and then from the traditional IRA converted the 17k (I requested 10% withheld for federal income tax purposes) to a Roth IRA. Therefore, approx. 15.3K was transferred to the Roth IRA.

Using this example / scenario, if my earnings from employment was 60K and I had short term capital gains income of 30k, would I qualify or would I need to recharitarize? I am under the impression that either the 17k or 15.3k that I transferred to the Roth would be added to my AGI and therefore I would go over. If either of these (17 or 15.3 are added) which one do I use for planning purposes?

Using the above scenario, if my earnings from employment was 30K and I had short term capital gains income of 60K, would there be any difference (90K in both examples) in determining eligibility for the Roth IRA conversion?

Are both earned income from employment and unearned income from short or long term capital gains included in determining AGI for Roth IRA eligibility purposes???

I want to do whatever I need to do to make sure I do not go over this limit as I truely believe the Roth IRA is the better long term retirement vechicle. I still have time to restrict my short term capital gains if necessary.

Thank you in advance for your assistance. If anyone has literature that you could forward or mention that uses some specific similar examples or lists all of the determinants in qualifying for the Roth IRA conversion, it would be greatly appreciated.

[This message has been edited by Kevin Martin (edited 06-25-2000).]

[Michael Devault]

The limit for conversion is determined from your MODIFIED Adjusted Gross Income. This is determined by taking your AGI from your income tax return and subtracting any income resulting from the conversion. (Other items are added back in, such as traditional IRA deductions, foreigh earned income, etc.)

So, in your example, the $17,000 converted would not be included in Modified AGI for purposes of determining conversion eligibility.

Check out IRS Publication 590, regarding IRAs. It's available in PDF format on the IRS' web site.

Hope this helps.

[BPickerCPA]

You made a mistake in having tax withheld. While it's true that the amount of the Roth conversion does not count for purposes of determining roth conversion eligibility, the tax withheld is both taxable and subject to 10% early withdrawal surtax. IN addition, since that amount was NOT converted, it's included towards the $100,000.

Barry

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Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

[Guest Art E]

Kevin

You stated -- "I truely believe the Roth IRA is the better long term retirement vechicle." --, and I'm curious why you believe this.

Did you get some projections (numbers) with and without the conversion that made you a believer? Or do you just wish/hope the Roth is best for you based on generalizations written about it?

As Mr. Picker pointed out, your decision to have some of the IRA withdrawal go for taxes rather than into the Roth apparently cost you over $2100 already. A visit to a financial advisor would have cost less. It's probable their advice would have avoided the $2100 expense, and possible that your situation is one where the Roth isn't especially advantageous.