Roll to ROTH

Today TaxMama hears from Jan, a loyal reader, who says, “My husband and I both have traditional IRAs and were wondering whether it would be worthwhile to convert them to Roth IRAs if this new law passes. I don’t like to pay taxes ahead of time but the prospect of being able to take the whole lump in one fell swoop is very tempting especially since we will be building a new home in the next 10 years. Suggestions?”

Hi Jan

Good question.

You know how I feel about converting IRAs to ROTHs and prepaying the taxes. But, if you have some good investments that will assuredly earn you more money than you lose by paying the taxes, it could be worthwhile.

Only, the special provision you’re talking about in the new law, that lets you pay the taxes over two years – that doesn’t apply until 2010. It will let you make the conversion in 2010 – and let you pay the taxes in 2011 and 2012.
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So, if you want to effect this conversion….

you’ll be paying all the taxes at one time. And if your IRAs have high balances, this conversion is likely to push you into a higher bracket, AMT, loss of itemized deductions, etc.

Rather than do that, see about pulling money out of your IRAs now – by annuitizing the draws. There’s an excellent article by Barry C Picker, CPA/PFS, CFP here, who explains the process.

You can draw smaller sums of your IRA money out over the next 5 or more years. You’ll avoid all the early withdrawal penalties.

You’ll avoid getting pushed up into higher tax brackets.

Then you can take that money and plop it into ROTH IRAs for each of you. And you can seek out good investments that will replace the 25% – 30% of the principal you’ve just lost by paying the taxes.

OR, just find great investments for the money within your present IRAs.
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Grow the money. And a year before you’re ready to buy the house, just start a business together. Make a profit. And open solo-401(k)s for each of you. You’ll be able to roll over each of your IRAs into your 401(k). And each of you will be able to borrow up to ,000 or half the 401(k) balance – whichever is lower.

(i.e. if your IRA only has $60,000, you may borrow 50% – or $30,000.)

No taxes. No nothing – just $100 fee from your 401(k) administrator. How’s that for an idea?

And remember, you’ll find answers to questions about IRA Rollovers and all kinds of tax issues, free. Where? Where else? At

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