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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121217  
Subject: IRA CONVERSION -Is it worth it? Date: 3/22/2003 8:52 AM
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I'm debating the worth of converting our 2002 Traditional IRA contributions of $7000 (3500. each) to Roth IRAs. In Jan. 2002 the funds were put into Traditional IRA accounts. Having only worked part of the year, our 2002 contributions meet the income demands for a Roth. We are 60 and retired and will not need this money for a long, long time so the benefits of a Roth appear great. However, not being able to take the Traditional deduction on this year's Federal taxes will cost me $600 more in taxes. So now I'm in a quandry - convert to a Roth or not? Any insight you coould provide would be appreciated.
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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64617 of 121217
Subject: Re: IRA CONVERSION -Is it worth it? Date: 3/22/2003 11:56 AM
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I'm debating the worth of converting our 2002 Traditional IRA contributions of $7000 (3500. each) to Roth IRAs. In Jan. 2002 the funds were put into Traditional IRA accounts. Having only worked part of the year, our 2002 contributions meet the income demands for a Roth. We are 60 and retired and will not need this money for a long, long time so the benefits of a Roth appear great. However, not being able to take the Traditional deduction on this year's Federal taxes will cost me $600 more in taxes. So now I'm in a quandry - convert to a Roth or not?

Even though you said "convert," I think you're referring to recharacterizing your 2002 contributions as Roth contributions. Some more information would be helpful:

1. How much total are your IRAs worth?

2. Have you made nondeductible contributions to your traditional IRAs? If so, how much?

3. It sounds like you retired in 2002. Can we assume that your income in 2003 will be less than in 2002?

I'm asking these questions because one option you haven't mentioned is to treat the 2002 contributions as deductible traditional contributions then convert to Roth in 2003.

Phil Marti
VITA Volunteer

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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64618 of 121217
Subject: Re: IRA CONVERSION -Is it worth it? Date: 3/22/2003 2:20 PM
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Even though you said "convert," I think you're referring to recharacterizing your 2002 contributions as Roth contributions. Some more information would be helpful:

1. How much total are your IRAs worth?

2. Have you made nondeductible contributions to your traditional IRAs? If so, how much?

3. It sounds like you retired in 2002. Can we assume that your income in 2003 will be less than in 2002?

I'm asking these questions because one option you haven't mentioned is to treat the 2002 contributions as deductible traditional contributions then convert to Roth in 2003.

Our total IRAs are worth a good bit but the only amount we are thinking of recharacterizing is the $7000 ($3500each) we put into a traditional IRA the beginning of 2002. We don't want to to recharacterize all our traditional IRAs.

My husband retired in 2002 & I have not worked outside the home in years. We expect our income to be less in 2003.

Tax Cut software tells us that our 2002 traditional IRA contributions will be worth a $280 deduction for my husband and a $3500 deduction for me.

I'm intrigued by the option you referred to above. How does one treat the IRA as a tradional, deductible IRA and then also convert to Roth in 2003? Bingo - maybe the light bulb just went on. Am I confusing or lumping together two separate issues. Hold I held the IRA account in 2002 is a completely separate issue from wanting to recharacterize it in 2003. confused!

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64621 of 121217
Subject: Re: IRA CONVERSION -Is it worth it? Date: 3/22/2003 3:58 PM
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Tax Cut software tells us that our 2002 traditional IRA contributions will be worth a $280 deduction for my husband and a $3500 deduction for me.

I'm intrigued by the option you referred to above. How does one treat the IRA as a tradional, deductible IRA and then also convert to Roth in 2003?


There are two separate issues: how you want to treat your 2002 contributions and what you want to do down the road.

In your husband's case one thing is crystal clear: He should recharacterize at least $3,220 of his 2002 contribution (and the earnings on it) as a Roth contribution. (IIRC you each made a $3,500 contribution.) One of the few no-brainers in tax law is the choice between a nondeductible traditional contribution and a Roth contribution. The IRA custodian has the necessary paperwork and formula for calculating the earnings. There will be a fee.

With respect to the other $280 of your husband's contribution and your entire $3,500, I'd leave them as deducted traditional IRA contributions on your 2002 return.

Now we look to the future. In any year that your AGI is under $100,000 you can convert to Roth any portion of your traditional IRA. You pay tax on the amount converted, but no penalty. The rules change in the year you turn 70 1/2, but I think that's a way off for you, so we won't worry about that now.

You'll find lots of discussion about the pros and cons of converting in the Retirement section of the Fool homepage.

If you need clarification on any of this, just holler.

Phil

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