Eligability to establish a Roth

[Guest mcampla]

A 66 year old man has a regular IRA. He would like to transfer a particular stock out of his regular IRA into a Roth to shelter the potential gain from the stock. Since his and his wife's only income is from his IRA and Social Security, is he eligable to establish a Roth?

[John G]

You are mixing up two different issues: [1] qualifying for a contributory Roth, and [2] Roth IRA conversion.

1. You need "earned income" to qualify for a Roth. This couple does not seem to have any income that would qualify.

2. Roth Conversion is an option for converting IRA value to Roth value as long as they meet the income qualifications. For example, married filing jointly modified AGI must be under $100,000.

Husband assets and wifes assets are separate pools. Any conversion is based upon the value of the asset as of the date of conversion. You can not convert an appreciated asset and get a tax break. While you can make the conversion based upon a specific asset, $$$ is $$$ for tax purposes in the year of conversion. You can convert dollars or assets, they are still valued on the day of conversion. Sorry.

There is an interaction between estate planning and IRA/Roths that needs to be considered, along with the difference between forced disbursements and no manditory payout. If this couple still wants to convert they may want to consider a modest conversion each year that keeps them from tax bracket jump.

State income taxes also come into consideration. If possible, folks should try to convert in a state such as FL, TX, NH, WY, Alaska that do not have a state income tax. For example, anyone planning to move to Florida in retirement would save money by doing their Roth conversion as a Florida resident.

[Guest Art E]

John,

I'm reading the question a little differently because of the word "potential". I assume he is "expecting" a specific stock now in his regular IRA to increase dramatically in the future and would like to move it to (more likely sell it in the regular IRA, move the $$$ and rebuy it in) a Roth. If so and it works out as expected, doing the conversion could be a good move. Of course, if the stock either tanks or simply doesn't grow, converting may be a bad move.

However, before doing anything, he should look at the numbers. One case would be where he keeps the super-growth stock in his regular IRA and buys some more of the same stock in his taxable account with the amount of funds that would be lost to Fed and State taxes for the conversion withdrawal. It is possible that this could be the better move, depending on ---- a lot of things.

Art