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Subject:  Re: Roll to Roth Date:  10/22/1997  5:49 PM
Author:  TMFPixy Number:  496 of 88495

Greetings, Jnamken, and welcome to Fooldome.

<<Could I get some help on this rollover from a normal IRA to a Roth IRA issue. I have $40,000 in my current IRA with $10,000 after tax contributions. I am 35 and wondering if it makes sense to roll the entire amount in 1998? Can I roll only the $10,000 after tax contributions into the Roth thereby avoiding a tax hit? Can I pay the taxes with funds other than what is in my IRA thereby preserving the size of the IRA?>>

We'll leave the issue of whether it makes sense to do that up to you. Only you know your tax situation in full. But to answer your other questions -- No, you can't just roll the $10K after-tax contributions to the Roth. If you take $10K from your IRA, part will be considered after-tax money and the rest pre-tax. You will be taxed only on the pre-tax amount, though. And not only can you pay the taxes due with other funds instead of the IRA money, you should do so at all costs. That's because anything you don't roll to the Roth will be considered a distribution to you. I assume you're under 59 1/2, so what you keep from the IRA to pay taxes would also be taxed and would be hit with the 10% early withdrawal penalty as well.

Quick example: On 12/31/97 your IRA is worth in total $40K, of which $10K is after-tax contributions. On 1/1/98 you roll it to the Roth. One-fourth of the amount rolled was already taxed, so you will owe taxes on three-fourths, or $30K. You must report that $30K as income and pay taxes on it over the next four years ('98, '99, '00, and '01). So in 1998, you would report $30K X 0.25 as income, or $7.5K. That $7.5K will be taxed at whatever marginal bracket you are in for each of the next four years.

Another example: Same 12/31/97 data, but on 1/1/98 you roll only $10K instead of the entire $40K. One-fourth of the $10K is after-tax money, so only three-fourths will be taxed, or $7.5K. In 1998 you report and pay taxes on one-fourth of the $7.5K, or $1,875. In 1999, you again report and pay taxes on $1,875. Ditto for '00 and '01.

Third example: You rolled $10K in 1998. On 12/31/98 your traditional IRA has a market value of $35K, of which $7.5K represents what's left of your after-tax contributions. You roll the entire $35K to the Roth on 1/1/99. Of that $35K, $7.5K will be untaxed, but $27.5K will be taxed. All of that $27.5K must be reported and all taxes paid in 1999. And you'll still have to report the $1,875 from the previous roll and pay taxes on that, too.

Ain't this fun?

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