Can I convert my IRA's?

On Jan 28, 11:51 am, "Mr. Nonsense"

It's generally a good idea to convert your traditional IRA into a Roth IRA, especially if you're young. Did you take a deduction for the 12k that you put into the traditional IRA? If yes, then you the 12k will be added to your AGI when you convert it to a Roth. You can always contribute to an IRA -- well as long as you have earned income -- but if your AGI is too high you can't take a deduction. So it's possible that you have nondeductible contributions in the IRA. If this is the case, and all your non-deductible contributions to the IRA were for example 8k, then you add only 4k to your AGI (12-8=4). If you have many IRA's (including SIMPLE and SEP), then the situation gets more complicated. Hope this is clear.

It's rarely a good idea to convert from a traditional IRA to a Roth. Unfortunately the "Roth Mania" has taken over, and I suspect that many will come to regret their decision.

If you have little pre-tax money in the Traditional IRA, I have no issue with the conversion. But, your details imply this isn't the case. The

12K traditional is pretax. With out knowing your other savings, there is no way to give you the right answer, but if you are funding Roths now, you are aiming for little in the way of pretax retirement money. This just means that the IRA withdrawals will be taxed at a low rate, why pay a higher tax today? One would need to save quite a bit pre-tax to save their way into a higher bracket at retirement. This conversion should be considered very carefully by those who think it's a slam dunk.

Joe

Suppose you're young with 30 years till full retirement age. Then suppose you're in the 28% federal bracket, 7% state, for a total of

35%. If you rollover the $12,000, the additional tax is about 35% of $12,000 or $4,200. The tax could be more because itemized deductions, AMT exemption, etc may be phased out.

But in 30 years that 12k could be worth 120k. Then you have 120k tax free in a Roth. But in an IRA you might have to pay 15% federal + 5% state tax on this 120k, which is 24k in taxes.

And if can pick stocks real good, then that 12k could even be 500k. Think of that.

Yes, ok, but the $4,200 in taxes paid to convert also grows to $42,000 of which $24,000 is needed if taken out at the 15%+5% you suggest.

In today's dollars, to be in the 25% bracket one would have to have a gross wealth number of over $2M to generate annual withdrawals high enough. Even if you took SS into account, the number remains well over $1M. The OP didn't state his age, nor anything else about his finances. In fact, he didn't even state his age. Without the rest of the story, no answer does him justice.

On Jan 28, 2:51 pm, " snipped-for-privacy@yahoo.com"

I can't seem to remember off-hand what I did. Is there an easy way to find out as these contributions were made nearly ten years ago. How does the IRS expect people to remember what was deducted when they withdraw money at retirement age?

On the other hand I am motivated to convert this IRA as it seems like such a headache keeping track of all the complex rules/laws surrounding it. If I can have everything in a ROTH Ira, that will keep things a lot simpler.

If you made IRA deposits that were not deducted, this is tracked via form 8606.

TurboTax tracks this from year to year, it never occurred to me that

8606 was such a headache, but if you feel this way, the cost of conversion, if any, may be worth it to you.

Again, without more details, one can't tell you if a conversion benefits or hurts you.

Several of the brokerages have online calculators to help you make a decision. I used the one at fidelity.com.

Much of the advise assumes one may be drawing from this IRA immediately after retiring. In most cases this would possibly be the LAST retirement yfund ou would tap, i.e not until your 80s. So you might consider this in your decision. Even converting in your 50s or 60s might make sense under this constraint.

Another factor is that tax brackets are scheduled to automatically rise 3% to 5% next year. So doing some conversion this year and paying the tax this year might make sense.

Lets say I never filed a form 8606 ever. Can I assume all my contributions were after-tax ? I suspect a significant percentage of people with IRA's don't even know what an 8606 is.

Even if you do file an 8606, is the IRS going to expect you to go through every single years for the past 40 years to determine what you can withdraw tax-free? Who keeps records for upto 40 years?

========================================= MODERATOR'S COMMENT: Forty years is pure hyperbole. And you need to keep only the last

8606 you filed. If you forgot, file 8606s now. There's a theoretical late filing penalty that no one believes has ever been assessed.

Unfortunately the default is "no basis", i.e. 100% taxable for the taxpayer unless you've filed the 8606. The 8606 is cumulative. You update in a year you either increase the basis with an aftertax contribution or decrease it by a regular IRA withdrawal.

The IRS is going to expect you to prove what you claim. The way you phrase your question it appears you never made an after-tax contribution to your IRA. Thus the assumption is that all withdrawals from it are fully taxable. If you claim you made after-tax contributions, have the records to prove it, i.e., proof of the contributions and your returns showing you didn't deduct the contributions.

Phil Marti Clarksburg, MD

I am confused by the OP's claims. I assume that what he means by "above the limit allowed for contributing to it" is that he could not make deductible contributions to his Traditional IRA. Isn't it correct that even in past years, nondeductible contributions to a Traditional IRA were permitted regardless of AGI or coverage by a pension plan (as long as earned income exceeded the amount contributed to the IRA)? Furthermore, if the OP's income was high enough that deductible contributions to a Traditional IRA were not allowed, wouldn't contributions to a Roth IRA be not permissible either? Would it have been possible in past years to "max out" contributions to a Roth IRA when income was high enough that tax-deductible contributions to a Traditional IRA were not possible?

--Dilip Sarwate

he be maxing

Nope. IRA (deductibility) phaseout for couple starts at $89,000. Roth phaseout $167,000.

There is a wide gap in which Roth is a no brainer. Joe

There is NO deductibility for Roth IRA contributions.

I didn't say there was. The traditional IRA has a phaseout for its deductibility. The Roth IRA for your ability to make the deposit.

There is a sweet spot in which you can't deduct the Traditional IRA, yet you can make a Roth deposit.

Joe, who continues to marvel at how darn complicated the tax structure is.