Advice on coverting Traditional IRA to ROTH

Make that "was" only $8,400. Too bad you didn't ask this question while you still had time to do something in 2007. (No, the April 15 deadline for 2007 contributions doesn't apply to conversions.)

Any amount you convert will be taxed as ordinary income, i.e., no special rate. To estimate the taxes you'll owe if you convert in 2008, use Form

Unless any of your contributions did not qualify for tax deductions, in which case you should subtract those contributions.

IRA withdrawals and conversions are taxed as ordinary income.

There would be no tax "penalty" on the conversion (as in 10% early distribution penalty), only ordinary tax, as previously noted.

You have the choice to convert less than 100% of the traditional IRA balance in any given year. From a financial planning viewpoint, be sure to take into account the following for 2008 and beyond (as mentioned, you're too late for 2007).

1. With an AGI (adjusted gross income) of only ,400, you would typically owe no federal tax. You might want to convert only the amount that takes you to the top of the 10% tax bracket, but not into 15%. For single, no dependents, that amount is calculated as ,950 (std deduction + exemption) plus ,025 (taxable income in 10% bracket), or ,975 total AGI. If you convert more, then the additional amount will be taxed at 15%. Even this rate may be good for you, however, if this is the last year for a long time that you will be below 25% tax bracket (which is likely once you graduate and go back to work full time).
2. It's recommended to have a source of funds other than the IRA itself to pay the tax on the converted amount, otherwise the amount withheld from the conversion to pay the tax *will* be subject to 10% penalty.
3. You don't state how much of your income is from earnings and how much from investment or other sources, but you might be eligible for the Earned Income Credit. Raising your AGI by converting "too much" of your IRA might lose you some or all of this refundable credit.
4. As a student, you might have other education-related tax benefits that are either gained or lost as you raise your (modified) AGI, thereby affecting your overall "effective" tax rate.
5. Although the point of an IRA is to save money for retirement, one side effect of converting to a Roth is that after five years, the converted amount can be withdrawn with no penalty and no additional tax even if you are nowhere near retirement age, thereby allowing it to be part of your emergency fund or other financial requirements (beyond just tax implications).

If you use tax software, you can create multiple "what if" scenarios for

-Mark Bole

The conversion deadline was yesterday (12/31). This is one of the things I remark that those who see their 'tax guy' or any financial advisor in March each year will miss out on this type of year end planning strategy. You plan to finish grad school and return to work in '08? I'd suggest you look at

JOE

Basically, less any deductions. If you are going to be in school at a low earning level for more than the one year, you could even split it into two transfers to ensure remain in lowest bracket providing some margin for the unexpected.

What about if you made a non-deductible IRA contribution and filed form 8606. When you convert that IRA into a Roth, do you still add it to your income? Reason I ask is I read somewhere that in 2010 they will eliminate the income limits to contribute to a Roth and convert a traditional IRA to Roth.

Also, is it possible to convert a Rollover IRA or a 401K into a Roth?

Too late-had to be done by yesterday (Dec 31, 2007)

For future planning, you should also consider your state's tax implication of doing the conversion.

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The taxable portion as determined by form 8606, will be taxed as ordinary income.

The rollover IRA is just an IRA that was formed by a rollover, and can certainly be coverted to a roth if all the other rules are met.

In doing so, you may lose some benefits of a rollover IRA including unlimited bankruptcy protection and ability to possibly move the rollover IRA to a qualified employer plan.

And the new law will now allow direct transfer of a 401k to a Roth IRA.

Didn't I address that in part of my message that you snipped? I said that you subtract the non-deductible contributions.

This assumes that you're converting the entire IRA. If you do a partial conversion, it's pro-rated.

Barry Margolin wrote: [...]

This thread seems to have several responses that repeat information already provided in previous responses...not sure why.

-Mark Bole

Oh, and I should mention that I will be taking standard (non-itemized) deduction.