The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: Re: Roth Conversion???||Date: 8/3/1998 6:51 PM|
|Author: WSProspector||Number: 4666 of 121802|
Dear KATinChicagoland, The following was posted on the SI Iomega thread this morning. Please comment as to whether the strategy described would be advisable. The scenario fits my situation as since I converted our IRAs to Roths in Jan-Feb time period this year, the valuation of the new Roths have dropped significantly due to stock valuations dropping after the conversion. If this could be done, then I would save quite a bit on the taxes based on the value of the stocks at the first part of the year. The idea would be to ultimately reconvert to the new IRAs to Roths again later this year, but at a much lower tax burden. Thanks Mel
Repost from SI thread:
To: Gottfried Mauersberger (839 )
From: Edwin Peters Monday, Aug 3 1998 12:02AM ET
Reply # of 845
New Roth IRA rule change will help those who converted then lost money.
As I recall, one of the IOM regulars converted to a Roth before the big crash in January. Whoever you are, read this. It will save you taxes.
As One Roth IRA Loophole Closes, Another One Opens
The July 22 signing of the 1998 IRS Restructuring and Reform Bill closed up a few Roth IRA loopholes. But as usual the pros have found ways around them.
Here's one of the loopholes the IRS cleared up: To roll your IRA over to a Roth, your adjusted gross income cannot exceed $100,000. But what if you roll over in June 1998 when your income is below the $100,000 and by some stroke of luck, your AGI jumps over that by year-end? The new bill says that you have until April 15, 1999, to roll that amount back to a regular IRA and pretend the whole thing never happened.
That's great news for income-hopping folks. But it's also good news for the rest of us. Here's why: As long as you have converted to the Roth by Dec. 31, 1998, the new law does not specify how many times you can roll back and forth throughout the year.
So let's say you met the income limitations back in May and converted your $50,000 IRA to a Roth. That means that (if you don't take the whole amount into income this year) you must take 1/4 of that amount -- $12,500 -- into income over the next four years and pay the corresponding income tax.
But what if the market corrects and your new Roth IRA account tanks? Let's say your new Roth drops to $35,000 before year-end. Under the old scheme, you'd still be stuck paying $12,500 regardless. Now, you can convert the account back to a regular IRA and then roll it back into a Roth. After this rollover, the amount you'll be paying tax on for the next four years will be only $8,750. If the account falls further, roll it back and forth again. There's no stopping you until New Year's Eve.
So if you converted your IRA to a Roth already, and see a market dip, act fast!
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