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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: SEP-IRA to Roth Rollover Date: 2/13/1998 2:32 PM
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[[- The SEP IRA is made up of stocks, bonds and some cash. I intend to transfer the entire SEP to a
Roth IRA within the same brokerage. Thus, I shouldn't have to sell and repurchase the securities in
the account. The taxable amount is $400k since that is the value of the account according to my last
statement (true?).]]

I'll assume that you don't have any non-deductible contributions in the account. If this is the case, then the taxable portion of the conversion would be the $400k that you note.


[[- My income will be increased by $100k each of the next 4 years. I understand that my FEDERAL
income will increase by that amount. What about my STATE income? Assume that I will have the
ability to meet my tax liabilities from sources outside of my SEP.]]

State laws vary. Some states will recognize the Roth IRA. Some may not. Check with your state in order to determine their tax policy on this issue. Your state could treat the entire distribution as taxable all in one year, and may also subject it to penalty.

[[- I expect several stocks within my account to rise substantially this year (they are technology
stocks that are just starting to rebound from being hammered in December 1997). Thus, if I have to
value the account at the time of the rollover, it makes sense for me to roll it over as soon as possible
and not wait until December 31st of this year...right?]]

Since I'm not a short term market timer, I'll steer clear of this question. I am advising clients to hold off on any rollovers until later in the year in order to determine that they will not exceed the AGI rules (and the potential penalties associated with an "invalid" conversion). Give congress and the IRS a chance to review this issue to find out what may happen. Also give IRS an opportunity to provide some additional guidance regarding the rules.

But, that being said, it would seem that your logic is correct.

[[- Starting in Jan 1st of 2003, I should be able to withdraw up to $400k tax free (even though I will
be under age 59.5). It should be federal tax-free, what about state taxes?]]

This is an issue that is unclear in my mind. At first I would have agreed. But in speaking with other professionals and looking at the actual wording of the law, I'm not so sure. In effect, this would eliminate the early withdrawal penalty after only 5 years after the conversion to the Roth IRA. I don't believe that congress intended this to happen...especially in light of the technical corrections bill that will be passed to close the prior early withdrawal loophole. As I say, most of the publications that I'm reading agree with you...but none of those publications are an official IRS position. This is one of the issues that I would like to see clarified.

[[- The only reason I should leave the money in the SEP is if I expect the value of the portfolio to
decrease. Otherwise it seems to me that I gain a lot of flexibilty, especially 5 years from now, on
having access to the money. And if the portfolio has dramatic gains, I can withdraw the gains
tax-free after I reach age 59.5. With the SEP, I will have to pay taxes on all the gains at ordinary
rates after age 59.5. Anybody see anything I'm missing here?]]

Again, without knowing more about your situation, it is impossible for me to comment. I would still recommend taking a more consertavite approach. You might also want a tax/financial pro to review your numbers and assumptions. You might also want to run you numbers through the worksheet at: http://www.rothira.com in order to confirm your results and assumptions.

Other Fools may have different opinions...
TMF Taxes
Roy
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