Traditional IRA Coverted to a Roth IRA

[lbfleischman]

If a taxpayer converts a Traditional IRA to a Roth IRA during 2009 will the conversion be taxable? The tax payer was forced to take a RMD on the Traditional for 2008. Would the tax payer be better off keeping the IRA as a Traditional during 2009 since there will be no RMD? What are the Pros and Cons for each position?

[RitaB]

I'm no expert, but here are some thoughts

If a taxpayer converts a Traditional IRA to a Roth IRA during 2009 will the conversion be taxable? The tax payer was forced to take a RMD on the Traditional for 2008. Would the tax payer be better off keeping the IRA as a Traditional during 2009 since there will be no RMD? What are the Pros and Cons for each position?

Yes, the conversion is taxable unless the Traditional IRA contributions were nontaxable. (That's possible, not likely.)

Especially if TP in a very low bracket, might be worthwhile to convert cause of no RMD, if it's important to him not to take withdrawals.

Another thought, if Traditional IRA is invested in the stock market, this may be the best possible time to convert because the account is probably worth less than it has been in a long time. So, he's converting fewer dollars to pay tax on.

[Snaggletooth]

Taking Distributions

RCooper, one of my clients had $800,000 in an IRA, and the value dropped to $500,000 by the end of 2008. He is 75 yrs old, and has been putting up with RMDs.

For 2009, a special exemption was passed for RMDs. There is no required minimum. I'm sure the prevailing thinking was so banks could keep more of their money. (I doubt any of the legislators did this to save tax money for elderly individuals).

My guy is going to take his $500,000 anyway. He believes the economy will rebound, and the securities will be worth $800,000 again in a couple years. His AGI fluctuates between about a half million and $1.5MM. His strategy here is that he is saving the ordinary tax rates of the RMD on the $300K that is going to be regained, and replacing them with capital gains rates, which can be zero if he doesn't sell anything.

Makes sense to me, so long as the congress and administration leaves capital gains rates alone....

[BHoffman]

Fat chance.

[RitaB]

Ah -

[QUOTE=Snaggletooth;76878]For 2009, a special exemption was passed for RMDs. There is no required minimum. QUOTE]

Hey, thanks, I didn't know that. (Obviously, and thanks for not rubbing it in.)

And, yeah, BHoffman, I too believe some rates will change...

[Mo Sheets]

Good News Starting in 2010

Beginning in 2010, the $100,000 income limit for conversions is supposed to be elimiated, as is the rule that restricts married taxpayers who are filing separate returns from converting to a Roth IRA. Thus, virtually anyone will be permitted to convert to a Roth IRA, starting in 2010. In addition, there is a special rule for taxation of conversions that occur in 2010. Unless you elect otherwise, none of the income from the conversion will be taxable in 2010. Instead, half of the taxable amount of the conversion will be taxable in 2011 and the other half in 2012. After 2010, the taxation of conversions will be taxable for the year of the conversion in the same way as under current law. I received this information in a bulletin from Harrison Building and Loan in Harrison, OH.