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Author: kenretired Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121180  
Subject: Partial IRA Conversions Date: 3/24/1998 10:22 AM
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Hi Everyone! I am a new fool so pardon any foolish things I ask, here goes. I am lucky enough to
have a very large amount saved up in my 401K and realize I can transfer over to a traditional IRA
and THEN convert to a Roth IRA. My problem is all the software I've seen out there converts
ALL of the IRA over as a whole and I haven't seen any that let you convert some over each year
when you pay the tax in a lower bracket. If I convert as a whole I get in a rediculous bracket and
wouldn't have that much cash to pay it anyway. I'm looking for a software which will allow me to make a series and annual conversions so that I can stay in the lower tax conversion brakets and thereby minimize my taxes and maximize my net. I'm ready to write my own spreadsheet but would
appreciate anyone who knows of any cheap software. The one I did see wanted about $400 and I'm
not even sure it would do what I want. HELP!!!!!!!
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Author: tc001 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3036 of 121180
Subject: Re: Partial IRA Conversions Date: 3/24/1998 11:46 PM
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<I'm looking for a software which will allow me to
make a series and annual conversions so that I can stay in the lower tax conversion brakets... I haven't seen any that let you convert some over each year when you pay the tax in a lower bracket...>

First, I don't think such software exists. To stay in the 15% bracket, you would need to know the bracket ceiling, personal exemption, and standard deduction rates, all of which go up each year. Unless someone can tell me differently, I don't think that information is available more than a year in advance. That would mean the software, like all tax sofware, would be virtually useless after one year.

Second, I'm not sure why you need software for this. All it takes is a calculator to determine the difference between your current year's taxable income (AGI minus standard deduction and personal exemption) and the top of the 15% bracket. That would be the amount you could roll over each year.

If I'm missing something more complex that you're trying to do, or if you're missing the simplicity of the calculation, please let me know so I can take another shot at this.

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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: 3073 of 121180
Subject: Re: Partial IRA Conversions Date: 3/26/1998 6:36 PM
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[[I am lucky enough to
have a very large amount saved up in my 401K and realize I can transfer over to a traditional IRA
and THEN convert to a Roth IRA.]]

If, and generally only if, you leave your employment and drag out your 401k account with you. If you are still employed, it is unlikely that you'll be able to pull out your 401k money.

[[My problem is all the software I've seen out there converts
ALL of the IRA over as a whole and I haven't seen any that let you convert some over each year
when you pay the tax in a lower bracket. If I convert as a whole I get in a rediculous bracket and
wouldn't have that much cash to pay it anyway.]]

It appears that you are forgetting that if you convert to a Roth IRA in 1998, you must spread that income over a 4 year period. That might mitigage the tax impact.

[[ I'm looking for a software which will allow me to
make a series and annual conversions so that I can stay in the lower tax conversion brakets and
thereby minimize my taxes and maximize my net.]]

You don't need any software to do this. You can just do it. I guess I'm not really following your question.

Before you leap, you might want to read my multi part post on the Roth IRA in the Taxes FAQ area. You might find it interesting.

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)


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Author: kenretired Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3121 of 121180
Subject: Re: Partial IRA Conversions Date: 3/30/1998 8:51 AM
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Thanks for the reply. I've been out of town. You are right. I could do it that way. I was going to use a speadsheet since your suggestion works till I hit 70 1/2 and then am forced to take out 401K/Traditional IRA monies at a proportion to life expectency. With a spreadsheet I could determine if I should be converting more to a Roth even though it would kick me into a 28% bracket but avoid the 39% bracket I will hit with my remainder balance being large enough to put me there at 70 1/2. I would just have to use the "present" brackets and adjust it they changed from year to year.
I guess I'm trying to optimize my net holdings and minimize my taxes (but then aren't we all?).
Thanks again.

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Author: tc001 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3136 of 121180
Subject: Re: Partial IRA Conversions Date: 3/30/1998 7:56 PM
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<I was going to use a speadsheet since your suggestion works till I hit 70 1/2 and then am forced to take out
401K/Traditional IRA monies at a proportion to life expectency. With a spreadsheet I could determine if I should be converting more to a Roth even though it would kick me into a 28% bracket but avoid the 39% bracket I will hit with my remainder balance being large enough to put me there at 70 1/2.>

This doesn't sound right to me, so maybe I'm misunderstanding you. If you don't convert to a Roth, are you saying that the *required* withdrawals will put you into the 39.6% marginal bracket? Do you realize that this would be an annual withdrawal of about $280,000 per year at today's tax level?

If so, then of course do the maximum conversion at 28% over several years. However (without me doing the math right now) it seems that if my interpretation of your statement is correct, you would have so much money in the IRA that you would never be able to finish converting it, even at 28%.

If you could clarify more it would be easier to give better suggestions.

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Author: kenretired Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3151 of 121180
Subject: Re: Partial IRA Conversions Date: 3/31/1998 8:49 AM
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Thanks. Here are some details:

I think you hit it on the head. I do have close to $1.7MM in my combined 401K plus lump-sum pension and it looks like if the market could get just 10%, I keep growing even by taking out living monies and I don't live high on the hog. By 70 1/2 I'll probably have over $4MM and that's why I think I'll be in the 39.6% bracket using the life expectency tables. I think you are right that I should convert maximum to Roth @ 28% consistent with my ability to pay the tax due with non-IRA monies. Then after the first 5 year waiting period on the first of the staggered Roth's I could pay the tax on subsequent Roth conversions. Does this sound right? I was initially converting just enough to keep me in 15% bracket so I could pay tax with about $200M I have in non-IRA/401K money and living on it too.

I don't think I'm the first to be lucky enough to have this much money saved but maybe one of a few to be concerned about the Roth unless they are using a high priced accountant. I am 55 so I can only withdraw my 401K monies w/o the penalty. Hope this clarifies. I didn't want to clutter the board with all this so I replied to your E-mail address. Thanks again.

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