Roth IRA Questions

It depends :).

The ability to make Roth IRA contributions is based on AGI. So see IRS Pub 590 for the limitations.

However, anyone can convert trad IRA monies to Roth IRAs.

The usual $5000 plus the $1000 catch-up if she's old enough, assuming there's at least that mich earned income.

I need to add - if your bride is unable to deposit to Roth, she is still able to make a non-deductable traditional IRA deposit. Now, if she already has pretax IRA money, any conversion is subject to the prorata rule, i.e. a conversion is subject to tax in the proportion the balance of all IRAs is pre-taxed money. If she has no such IRAs, she simply does the "Back Door Roth" (Which I prefer to call the Texas two step) where she deposits to the IRA, and immediately converts.

By the way, I'm a fan of converting to top off your current bracket if one is destined to have a decent level of income at retirement.

I need to add - if your bride is unable to deposit to Roth, she is still able to make a non-deductable traditional IRA deposit. Now, if she already has pretax IRA money, any conversion is subject to the prorata rule, i.e. a conversion is subject to tax in the proportion the balance of all IRAs is pre-taxed money. If she has no such IRAs, she simply does the "Back Door Roth" (Which I prefer to call the Texas two step) where she deposits to the IRA, and immediately converts.

By the way, I'm a fan of converting to top off your current bracket if one is destined to have a decent level of income at retirement. ========================== I'm surprised at how many people have [low valued*] traditional IRAs where they never converted to Roth accounts, and now, with our tax increases pending, they will pay the price for not planning ahead. I'm also surprised at how many people make their contribution for the year after the year's close when preparing their tax returns, instead on January 2 of the year the contribution is for. By delaying, they're losing out on about 15 months of time and earnings. Similarly with HSAs, ESAs, and other tax deferred or tax exempt accounts. My comments don't apply to 401(k) accounts because the contribution schedule is out of the hands of the taxpayer/employee.

• - M and below.

As long as she is still young enough to contribute to a conventional IRA.

Don EA in Upstate NY

Agreed, but even though she's stated as being of retirement age, she can still pass for 40, so she's clearly not 70-1/2 yet. But good point to note for others.

Well, I meet your definition of "low valued" trad. IRA, and I can't see where it makes sense for me to convert any more right now than the 10% or so I converted a few years back (along with some regular contributions we've made over the years).

Most people seem to forget the opportunity cost of paying taxes now on a conversion. That same money could well be invested in long-term non-retirement accounts, or paying down debt, etc, for the same or better result than using to to convert to a Roth. LT cap gains rates may rise but will still probably be lower than regular rates.

Your observation about contributing at the beginning of the year instead of 15 months later is also not very powerful. In today's environment where interest earnings are essentially non-existent, by delaying you could also miss out on 15 months worth of market losses instead of gains. Sure, recharacterization can be a mitigating factor, but it's not a cost-free transaction.

Even if we take your advice, it's only a one-time benefit. After you shift to making annual contributions at the beginning of the tax year, you are still only making contributions once per year. Kind of like accelerating your mortgage or real estate tax payments into December... it only helps one time, not year after year.

I agree in general, although it depends how far you are into your current bracket. There are some nuances.

For example, if you are in 15% bracket and, say, $10K from the top, then by all means convert $10K if you can afford the tax.

On the other hand, if you are right at the top of 15% bracket, I would simply make a Roth contribution, not a conversion.

And, if just a little bit into 25% bracket, I would consider a Trad. Roth contribution to get back down to 15%, no Roth at all.

Your language is confusing.

If you have a ROTH IRA at a broker it is already a self directed IRA. You do not want to change a ROTH IRA into any other type of IRA.

Or is the broker saying they want a second IRA account independent from the ROTH IRA? This seems very strange.

Please name the broker so their IRA rules and fees can be researched.

Or switch your accounts to another broker that is not out to fee you to death.

I just went through this at my broker. I went from a self directed Roth Account to a Roth Account that the broker does the managing of the portfolio. I had to set up a new account but the broker assured me there would be no tax consequences since I was just moving the portfolio from one Roth to another Roth.

If broker can't beat an Index 500 by Vanguard, leave it immediately and go back to self directed. You just got hammered by a lot of fees.

As far as I can tell, noone has answered your last question. If you covert a (traditional) IRA into a Roth IRA, the 5 year clock on that conversion is still in effect. You can do anything you want with the rest of the Roth, if it's been open 5 years, but there is still a "penalty" of sorts if you withdraw a conversion within 5 years.

-- Arthur Rubin, AFSP, CRTP, Brea, CA Support SEA (the Society for the Elimination of Acronyms)

There's no 10% tax if you're over 59 1/2 when you take the distribution. See IRS Pub. 590-B, pg. 30.

The tax content here is getting a bit thin, but I hope the moderator will let me correct the common misconception embodied above.

Investment managers CAN'T beat the market, not consistently over the long term. Even worse, their past performance has no significant correlation with their future performance.

For a short treatment of this, with historical data proving the point, see Leonard Mlodinow, /The Drunkard's Walk: How Randomness Rules Our Lives/. For a much fuller view, exclusively about investments, Burton Malkiel's /A Random Walk Down Wall Street/ is unsurpassed. What they have in common is that they prove their point by statistical analysis of actual data from the market over many years.

Well, actually, the chart on page 30 determines whether it's a qualified distribution; the text on page 29 notes that the 5-year rule is different for the 10% penalty and for whether the distribution is qualified (non-taxable). The text on page 29 says "You _may not_ have to pay the 10% additional tax if" taxpayer is over 59-1/2 at the time of the distribution. (Emphasis added.) You (Ira) may be correct, but publication 590-B is not on point.

-- Arthur Rubin, AFSP, CRTP, Brea, CA

The text on page 30 (the very end of the page) that I was referring to is precisely on point:

"Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Exceptions. You may not have to pay the 10% additional tax in the following situations. You have reached age 59 1/2. ..."

Ira Smilovitz, EA

If you do a Roth conversion, you have to pay tax on your "basis" in the converted money. If you have more than one traditional IRA, you must aggregate this across all such accounts.

Examples:

You have $100,000 in ALL your traditional IRA's combined, and all of it was tax-deductible at the time it was contributed (either because you contributed to a deductible IRA or it was rolled over from a 401(k), and keep in mind all EARNINGS are considered tax-deductible for this calculation), and you convert $10,000. You add $10,000 to your taxable income.

You have the same $100,000 but only $50,000 of it was deducted (perhaps some was contributed when your income was too high to make tax-deductible IRA contributions) and convert $10,000. You add $5,000 to your taxable income.

You have the same $100,000 but none of it was deducted, you add $0 to your taxable income.

Note that the last scenario is almost impossible. It would take many years to hit $100,000 while making non-deductible contributions and you must surely have had some earnings in that time, which would count as deductible. However if the amounts were smaller and you converted before you had much/any earnings, the non-deductible part could be much greater. (This is an example of the "backdoor" Roth IRA.)

While beyond the scope of the OP question, note that the backdoor Roth is still legal (it could well go away soon) and one way to make it effective, if you have deductible IRA's, is to roll those funds into an employer plan that will accept them, before making your non-deductible IRA contributions. Even if you don't work for such an employer, if you have any self-employment income you might be able to open a self-employed 401(k) with a trustee whose plan documents allow for such roll-ins.