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I am currently reviewing my taxes/financial situation and have the following two questions.

My wife has a traditional IRA. We did not convert this to a Roth in 1998 because we had some potential income that could have placed us over the AGI limit. In retrospect I probably should have converted anyway especially since in the end we did not exceed the limit. My questions are.

1) If I convert now will I have to pay all of the applicable taxes in 1999 return? Was there any IRS last minute reprieve on the spreading out over four years applying only to conversions in 1998?

2) Can I, or better yet, SHOULD I continue to contribute to this converted account? Or should I just start a new IRA and let the converted one sit. I seem to recall some advice that suggested I do the latter.

Thanks,
Steve
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Greetings, Steve, and welcome. You asked:

<<I am currently reviewing my taxes/financial situation and have the following two questions.

My wife has a traditional IRA. We did not convert this to a Roth in 1998 because we had some potential income that could have placed us over the AGI limit. In retrospect I probably should have converted anyway especially since in the end we did not exceed the limit. My questions are.

1) If I convert now will I have to pay all of the applicable taxes in 1999 return? Was there any IRS last minute reprieve on the spreading out over four years applying only to conversions in 1998?>>


Actually, you may convert a traditional IRA to a Roth IRA for tax-year 1998 as late as April 15 should you wish to do so. You just can't use the four-year income spread if you do because that expired on 12/31/98. Regardless of which tax-year you desire (i.e., 1998 or 1999), all income based on the conversion is reportable and taxed on that year's income tax return. There was no extension of the four-year income spread deadline.

<<2) Can I, or better yet, SHOULD I continue to contribute to this converted account? Or should I just start a new IRA and let the converted one sit. I seem to recall some advice that suggested I do the latter.>>

There's absolutely no reason you should keep separate accounts for your Roth IRA, contributory and/or conversion. The IRS Restructuring Act dictated the withdrawal priority for Roth IRAs and stipulated that all Roth IRAs are aggregated for withdrawal purposes. Therefore, separate accounts will only complicate your administration through multiple statements while serving no useful purpose. Withdrawals will be considered as coming first from annual contributions, next from conversion contributions (earliest to latest) and last from earnings. That order pertains regardless from which Roth IRA the withdrawal is made.

Regards…..Pixy

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Pixy,

Thanks for your response. From this information it seems best to convert the traditional IRA and then combine the two into one account.

The only follow up question I have is what did you mean by "all Roth IRAs are aggregated for withdrawal purposes"?

Steve
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Steve asks:

<<The only follow up question I have is what did you mean by "all Roth IRAs are aggregated for withdrawal purposes"? >>

You may have more than one Roth IRA with the same or different providers. They may also be a mixture of type (i.e., those with annual contribution money and those with money from converted traditional IRA). When you take money from any of them, all of them are viewed as a single IRA in total regardless of which one(s) you use for the withdrawal or what type they are. Priority of the source of the money withdrawn goes (as I said in my prior post) first to annual contributions, next to conversion contributions from earliest to latest, and last from earnings.

Regards....Pixy
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