As it stands right now, the $100k income limit for doing a Roth Conversion is not coming back. However, I am hard-pressed to believe that it will stay this way indefinitely. The one-time opportunity associated with 2010 is the ability to spread the tax liability over two years.

I have one follow-up question. Is this Roth IRA conversion loophole, a onetime loosening of the rules for 2010? Or have the Roth IRA conversion minimums been removed for all years going forward?

The AMT has not been much of an issue in our conversion calculations. AMT essentially makes you take your after-deduction income and add back certain deductions (taxes, misc. itemized, etc.). Then, once you get this new income number (the AMT taxable income), you have to multiply it by either a flat 26% or 28% depending on your level of income (essentially a flat tax). Realistically, the types of individuals whom we have seen the conversion make the most sense for are those who fall in the 15% – 25% brackets (not hit by AMT) or high earners that have passed the AMT threshold. While I’m sure there are individuals and situations where this problem could occur, I would image the other screens we suggested (outside funds to pay the additional taxes, high relative basis in total IRAs, ability to leave balance for at least 5 years, etc.) would help to avoid having to analyze the AMT implications. As for spreading the taxes, we recommend maxing out the 15% or 25% brackets in the current year. Without knowing for sure the future of tax rates (2011 and 2012), it is difficult to say definitively when will be the most advantageous time to pay the taxes. As we learn more, and Congress releases more information, it will be easier to make these decisions.

I hope this helps!

Great question! One of the really great things about this Roth conversion is that you actually DON’T have to aggregate IRA balances between spouses. Each spouse must file their own IRS Form 8606 (unless the form changes in 2010). As I currently understand the conversion, in your example you would have $80k basis with total IRA balances of $680k. This means that about 88% of the amount you convert would be taxable. Your wife, however, would have total IRA balances of $20k with a $20k basis. Therefore, she would be able to convert all $20k without creating a taxable event.

Thanks for the question and I hope this clear things up!

I thoroughly enjoyed listening to your Roth conversion podcast this morning and admire your willingness to take on such a complex decision as conversion and try to boil it down to finite scenarios. I’ve been wrestling with this for my clients.

I wonder if, in your analysis, you’ve had as much difficulty integrating the Alternative Minimum Tax as I have in developing guidelines. Putting aside the fact that it will require an act of congress (literally) to index the 2010 AMT exclusion to be in line with 2009, if I assume an indexed 2010 AMT, $3,000 real estate taxes (typical for my clients), and a 6% marginal Missouri income tax, I have eight marginal tax brackets for married filers in 2010 to compare to unknown, future rates!

Also, if I use the tax rates as they stand today (Bush tax cuts expiring in 2011 and tax rates going up a minimum of 3%), I have yet to see a client who is better off spreading the taxes over the (higher) 2011 & 2012 tax years if they expect a comparable income in those years. Has this been your experience? For those with large balances to convert, spreading the income over multiple years may push some of the dollars into a lower bracket, but as the $100,000 limit is not coming back, this can be achieved with partial conversions ‘filling up’ the client’s marginal tax bracket year after year.

Again, most of what I’ve seen & heard has been written by journalists rather than practitioners so it was great to hear your point of view. Keep up the good work. I look forward to every podcast.

Sincerely,

John Dutemple, CFA, FSA
President

Compton Advisors, LLC – Planning Futures, Managing Wealth

Thank you

(I suspect the answers are “yes” and “yes.”)

Enjoyed the show on Roth Conversions. I wanted to point out one area I think you neglected. I have a 401k which held after tax contributions. I checked with my company’s plan and they allowed me to separate the after tax contribution portions and convert to a Roth. I’m fortunate in that the pre-tax and after tax contributions were separate. Since, I hadn’t had any return on the after tax amt, I was able to convert $25k into a Roth at Vanguard tax free. So, now going forward – all growth will be tax free.

Anyway, great show. I really enjoy it.

Mike/Colorado

LOVE this show. I had to do so much homework on my own, before the podcast, to figure out what you had in this compact and wonderful 55 minute podcast. Bravo on all the hard and clear work. Just a couple of comments.

1) I too have post-tax IRA(s) and thought I was home free! HA HA! We have a rollover IRA from my previous employer. So because I cannot cherry pick my IRA(s) to convert, I looked into the options at work, and guess what – they allow us to roll my existing (ROLLOVER IRA ONLY) IRA into our 401k at work! So once I do that I will be left with JUST my non-deductible IRA and now the cost of the conversion is way low. So please check with your employeer if that is an option!

2) To double check the calculation – check out this guys website, it is nice and clear, and gives great examples. http://www.goodfinancialcents.com/2010-traditional-ira-to-roth-ira-conversion-tax-rules/ and http://www.goodfinancialcents.com/2010-roth-ira-conversion-rules.

Jetfxr
Memphis

I’m a little confused about your question. I noted in the show that a good ‘rule of thumb’ check-up is to take your age, multiply it by 10%, and then multiply that by your annual income. I’m not sure what you are asking for with ranges? The point I was making is that this won’t always work for young individuals just starting out in their career. For example: a new college graduate may start out making $25,000 a year at 22 years old. According to the equation, he would need to have a net worth of $55,000 dollars. This may be a little ambitious for someone just starting out. I think a good starting point to use this calculation would be someone who has been in the work force for at least 5 or 6 years.

Thanks for a great show!