Roth IRA

[Joe Btfsplk]

Suppose you wanted to roll over $200,000 from your tax-deferred Rollover IRA in increments to prevent going from the 25% or 28% bracket to the 35% bracket.

Assume you have $500,000 in the tax-deferred rollover and are not affected by any AGI cap that would limit your payments into the Roth IRA.

Could you roll it over incrementally by rolling over $20,000 or $ 30,000 each year until you had taken out the $ 200,000? Or would you have to roll over your entire tax-deferred IRA all at once.

Publication 590 does not seem to give an explicit answer.

[OldJack]

Yes... you can make partial conversion amounts to a Roth IRA. There is no requirement that the full balance of the retirement account be converted. Of course you are going to pay current year income tax (plus any penalty due) for the amount converted to the Roth IRA.

[Matt Sova]

What penalty?

Converting to a Roth avoids the 10% penalty. As I am typing this I am thinking you may mean estimated tax penalty which can be avoided by paying an estimate.

[Joe Btfsplk]

Thanks.

I saw nothing in Pub 590 requiring full withdrawals, and you have given me further clarification. Page 13-15 of the Tax Book also indicates partial recharacterizes are OK.

Any thoughts on this strategy for someone over 70½, still working and earning over $ 5000 per year who has a RMD of $20,000 per year from his tax-deferred rollover:

Take out $ 20,000 in cash from the tax-deferred IRA to satisfy RMD.
Contribute $ 5000 to the rollover.
Rollover $ 20,000 in securities from tax-deferred to Roth IRA.

This would gradually deplete the tax-deferred IRA and if the Roth IRA holder died, the distributions would be tax-free.

While the taxpayer was still living, even if Roth funds were invested in taxable bonds the Roth would grow tax-free and withdrawals would be at the option of the taxpayer rather than mandated by the RMD rules. Sounds better than buying municipal bonds.

[Unregistered]

One question

Is the client going to put the $5000 in the Traditional or the ROTH? Makes no sense to put it in the Traditional, when the goal is to move money into the ROTH (except tax deduction), since RMD will be calculated off a higher amount the next year.

JoshInNC

[Joe Btfsplk]

I misstated it

I should have said, "put $ 5000 in the Roth as a contribution to the Rolth over and above the amount moved from the traditional IRA to the Roth."

You cannot add to a Rollover IRA anyway other than by transferring into it from another tax-deferred retirement plan. Also, if over 70½ you cannot contribute to any kind of IRA other than a Roth.