The Motley Fool Discussion Boards

Previous Page

Financial Planning / Tax Strategies


Subject:  Re: MO Roth/Income Splitting issues Date:  8/5/2005  3:25 PM
Author:  irasmilo Number:  80272 of 132521

I have skimmed through the instructions and my understanding is sort of vague. Is it possible to accomplish something similar to what I want through a rollover of IRA assets from previous years' contributions (she has a stockpile of old Traditional IRA contributions and 403(b) contributions that could be used) or would those be deemed to be simply recharacterizations also?

I hope that is clear...

Unfortunately, yes. Too bad the answer won't be as clear. If all of her past IRA/403(b) contributions were pre-tax (that is, deductible when made), then the answer is easy. All amounts converted to a Roth IRA will be taxable income to her in the year of conversion. If I understand MO taxes correctly, the first $6000 of conversion income will be tax-free. This doesn't reduce the taxes on your income or divert some of it to your wife, but it does allow you to get money into the Roth for her. Whether that's a good thing or not really depends on your long-term expectations -- will you be in a higher tax bracket in retirement than you are now, will you need to draw on your IRA in retirement, do you plan to leave your IRA to your heirs, etc.

However, if any of her previous contributions were after-tax dollars, a typical conversion will be partly taxable and partly tax-free. You'll need to complete Form 8606 to work out the details. This could lead to an interesting set of circumstances. Contribute $4000 to her traditional IRA pre-tax and then convert $4000 to Roth IRA. I don't remember what the ordering sequence is... whether you just consider the $4000 current year contribution and eliminate both the deduction and conversion income, or whether part of the conversion cosists of after-tax dollars leaving a net deduction on the federal return.

Copyright 1996-2021 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us