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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76629  
Subject: Re: cap gain/roll to roth Date: 10/22/1997 8:49 AM
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Greetings, ESP, and welcome to Fooldom.

<<I'd like to second jmb's questions. As I understand it, rolling over into a Roth IRA will be treated exactly like taking a distribution - but without the 10 percent penalty that would normally apply for withdrawing before 59 1/2.

Does this mean that the rollover would be treated as normal income (i.e. it doesn't matter whether you sell the stock or not)? I also am interested in more details on how you calculate taxes on this - I've read that you can spread the tax out over 4 years. Does this mean that I spread the income out over 4 years (keeping me in a lower tax bracket each year), or do I report the extra income all in one year and pay the extra tax over 4 years?>>

Your understanding is correct. There is no 10% penalty and everything is treated as ordinary income. Take a look at my reply to JMB located just before this one. I think I answered your concerns there, but if not, just ask again.

Regards……Pixy
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 494 of 76629
Subject: Re: cap gain/roll to roth Date: 10/22/1997 3:29 PM
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Yo, JMB.

<< If you have $11K and are in the 28% marginal tax bracket, that means you will have an additional tax of $3,080 to pay in 1998. You may, though, choose to spread that over four years. If you do, you will include one-fourth of the $11K in your 1998 income, one-fourth in 1999, etc, and pay the taxes due based on your marginal rate in each of those years.>>

On reading the Act again and doing some further research, I discovered there is no choice in this matter. If the IRA is transferred in 1998, then it MUST be spread over four years. That means income and taxes are spread equally from 1998 through 2001. Sorry about that.

Regards.....Pixy

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Author: jmbarnes Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 499 of 76629
Subject: Re: cap gain/roll to roth Date: 10/22/1997 9:56 PM
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Hey Pixy:
Thanks so much for the help. You fools are doing a fabulous job of staying on top of all these boards. I thought of one more question after reading your response to jnamken (#534). what I'm wondering is if I have to figure the value of my traditional IRA on 1/1/98, or can I watch the value and roll to Roth when the value drops. I doubt it will make much difference with my small amount (+/- 11K), but I do have some stocks in the IRA which are pretty volatile.

Thanks again,
JMB

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 505 of 76629
Subject: Re: cap gain/roll to roth Date: 10/23/1997 10:51 AM
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Yo, JMB.

<< I thought of one more question after reading your response to jnamken (#534). what I'm wondering is if I have to figure the value of my traditional IRA on 1/1/98, or can I watch the value and roll to Roth when the value drops. I doubt it will make much difference with my small amount (+/- 11K), but I do have some stocks in the IRA which are pretty volatile. >>

When dealing with after-tax money in an IRA, the part of the withdrawal that is untaxed is essentially based on the ratio of that sum to the market value that exists on Dec 31 of the year of the withdrawal. Your plan could possibly work, but you're still trying to predict the future. You won't know the account balance until the end of the year.

You may be confused because I was too sloppy in my second example to jnamken. I said:

<<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.>>

That left out a key sentence: " On 12/31/98 the account balance is $30K which, when added to the distribution of $10K, means one-fourth of that distribution is not subject to tax." Sloppiness does come back to haunt one, doesn't it?

Regards……Pixy


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