12 Traps With Roth IRA Conversions

January 25, 2010 • Page 5 of 5

However, two tax traps can still trigger the 10% penalty, he said. One of these traps is if some (or all) of the funds withdrawn are used to pay the conversion tax. Since funds used to pay the conversion tax are not actually converted to the Roth, they are subject to the 10% penalty and income tax.

The second trap occurs when funds converted to the Roth are withdrawn within the first five years and the Roth IRA owner is still under age 59 1/2. You can't avoid the 10% penalty by first converting to a Roth IRA and then withdrawing converted Roth funds to pay the tax.

There are more traps awaiting the ignorant. Slott's best advice: In every Roth conversion, make sure you address each and every tax and planning detail-preferably with a professional who knows what he is doing.

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3 Comments

Comments

fundinvestguru 13 years ago

Potentially The Biggest Benefit Of Roth IRA Conver

One of the biggest benefits of a Roth IRA conversion may have nothing to do with the tax consequences; it may have everything to do with the freedom to make your own investment choices.Consider this: there was $11.1 trillion in America's Tax-Deferred Retirement Savings at the end of 1999. A decade later that amount was $14.4 trillion including all of the contributions made during the decade.If those same investors had simply invested in a 0% interest money fund, the total would have been $28.4 trillion. Why? They would have avoided two disastrous bear markets.You have to question the value of "conservative" investment funds that lost money, company stock and inexperienced target maturity funds whose major distinction is that many of their investors will never see their investments intact in their lifetimes.What might you invest in? Search your Monringstar Mutual Fund and Separate Account data bases for accounts that earned double-your-money-in-a-decade 7.2%+ returns and won 10-year high-return, 10-year low-risk AND current five-star ratings and ask the 40 accounts left what their plans are to protect you from a rising interest rate bond market. Those who have no answer will be revealing.If you are going to make money 100% income tax-free in your Roth IRA, you will have to make the experience better than tax-deferring losses in your current IRA and 401(k).
lencoris 14 years ago

Roth IRA Traps - Medicare Part B

The increase in Medicare Part B costs, which are based on one's modifed AGI from two years before the current year, will occur in 2012 if all of the rollover income is taxed in 2010. (If the income is averaged during 2011 & 2012, the Medicare costs for 2013 and 2014 will be affected, and things become more complicated). The solution for a one year increase in 2010 is to file a "Life Changing Event" form with Social Security and request that your 2011 or estimated 2012 MAGI be used to calculate your Medicare Part B premium in 2012. Any premium reduction is retroactive to the beginning of the calendar year.
michaelk 14 years ago

Roth IRA Traps

Other traps would include consideration of state and local income tax, and the tax clause under ones will.You would want the taxes paid from assets other than the Roth.

12 Traps With Roth IRA Conversions

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