How can I invest to be qualified to roll a regular IRA into a ROTH in

[Guest Doug]

I want to roll over a portion of my regular IRA into a ROTH in 2001 as part of my estate tax planning. To do this I need to keep my 2001 income below $100,000. How can I invest a considerable amout of cash for 2001 such that I can be sure it will yield no AGI income for the year? The two ways I have in mind are US Govt I bonds and CD's that expire after 2001. What else can I do?

[John G]

Some more ideas: Index funds often have little capital gains or dividends. Some index funds are also tax managed, such as the Schwab1000, which I think has never had any forced capital gain distributions. You accomplish much the same thing by investing without selling stocks, and if no/low dividends better still.

Other ideas: take losses next year, schedule any lumps in this year (like year end bonuses)

Changing deductions has no impact on MAGI. Note the conversion itself has no impact on the qualifying income.

If you start a company and have initial expenses/losses, they come off 1040 page one often as Sched C items.

Finally, you may see in future years some changes to the 100K limitation. Write your congressional reps and let them know. Also, there are a number of proposals that could change the estate taxes, so you need to keep an eye on those as well. Bush wants to eliminate estate taxes entirely, the Dems have proposals to increase the current thresholds. Lots of talk, maybe someone will give that rock a nudge.

You can easily outsmart yourself about changing your afairs based upon tax issues. Be flexible, be alert for regulatory changes.

[Guest Paul Leslie]

Doug where is your income going?

If you are close to 100k now, why would you think your income would go down in the future? The Roth conversion amount is not included in that 100K amount.

Leave the money in a savings account, it will earn you 2-3%. You may need this money because if you do a conversion, you may need the extra cash to pay the taxes. Remember, you don't get the four year spread anymore, so if you convert 150k from a traditional IRA to a Roth your income jumped by 150K for that year.

I'm not sure what your estate planning goals are but the Roth really only helps the beneficiaries. It doesn't reduce your estate for Federal estate tax purposes. Now the the benneficiaries may not have to pay income taxes on the earnings becuase you paid it for them indirectly by converting it. This is real good deal if you are in lower tax bracket then the beneficiaries and money in the Roth grows after the conversion.

One last thought is watch out with doing the CD. Many banks will credit your account with interest it earned during the year, so even though the CD comes due next year you will have to report the interest income. Check with the bank before you do that plan.

[Guest Doug]

Paul-Thanks for your response. I plan to set up a Rauth IRA for my children's benefit. They will be the beneficiaries of the Roth. I realise I have to pay taxes on the amount rolled from my IRA to a Roth and I have figured out how to raise the money for the taxes.

I have been living off my stock option income, interest and dividends while also accumulating cash. Since I will not have option income next year I believe I can get my income under $100,000 and I'm just trying to make sure I invest about $100,000 the best way possible without spinning off income next year. Hope this helps.

[John G]

You may want to consider another option with regard to your children. If they have earned income but are not funding an IRA, you can establish Roth IRAs for them. For example, a teenager with part-time income often will clear the 2,000 mark. That money may be going towards college expenses. You can fund their Roth.

If you wish to shelter more than 2k x number of kids, then the Roth conversion may work if you qualify.

[Guest Mary Ann]

Just a thought in response to Paul's statement of "I'm not sure what your estate planning goals are but the Roth really only helps the beneficiaries. It doesn't reduce your estate for Federal estate tax purposes."

Actually, the fact that the tax on the Roth conversion will be paid will take a chunk of money out of the estate and thereby reduce the eventual amount subject to estate tax. Since taxes on a traditional IRA will have to be paid by someone at some time (before or after death), if the estate is large enough to have a potential estate tax, this is one way to reduce the size of the estate. And at the same time set up a wonderful asset to pass on to beneficiaries. If it weren't for the $100,000 AGI limitation I think we would see a lot more of this.

[Guest Paul Leslie]

That is a good point that any income taxes paid would not be part of the estate.

The point I was making was that converting a Traditional IRA to a Roth does not move those assets out of your estate like gifting would do. So if Doug was to leave the money in the Roth for 15 years until his death, the full value of the Roth will be included in his estate. So if his estate planning goal was to move assets out of his estate to avoid future appreciation, converting a traditional IRA to Roth would not do that, except to the extent he has to pay income taxes.

[Bruce Steiner]

Municipal bonds maturing after 2001 and not callable in 2001.