This investor sees their roth ira not as a retirement

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account. This investor sees their Roth IRA not as a retirement funding instrument but as an estate asset. As you learned earlier, those seeking to diversify the taxability of their retirement income sources might also consider converting to a Roth IRA. Who would not be a good candidate for a Roth IRA conversion? Those for whom a Roth conversion is not the best idea include investors with little financial means. If someone does not have enough cash available outside of the Roth conversion process with which to pay the conversion taxes, then they should not attempt a conversion. There are also some taxpayers who will use a Roth conversion calculator and based on their unique situation, it just is not best for them. A Roth conversion can be a great tool, but it is not right for everyone. Q: What is the process for a Roth Conversion? A: Any portion of a Traditional IRA can be converted into a Roth IRA at any time. This scenario will involve the IRA owner realizing current ordinary (taxable) income in the amount of the conversion. They should be able to pay the taxes from assets outside of the conversion process. This will effectively convert tax- deferred assets into tax-free assets, but the cost is the current taxation. Various calculators are available on the Internet to help someone assess if this might be a good option for them to consider. Q: What is the 5-year rule as it pertains to Roth IRAs? A: Assets within a Roth IRA are not available for tax-free withdrawals, assuming age constraints or other special scenarios have been met, until 5 calendar years have passed after the first contribution into any Roth IRA registered in the taxpayer’s name. Q: A client of yours has a taxable account, a 401(k), and a traditional IRA, which was the result of a rollover from a previous employer’s profit sharing plan. They are thinking about converting their
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traditional IRA into a Roth IRA. They are concerned about realizing a substantial amount of additional taxable income in one tax year. What would you tell them? A: Roth conversions can be initiated in small amounts. They need not convert the entire traditional IRA in one batch. They could convert whatever amount they feel that they can handle as additional taxable income. Q: A different client approaches you about converting $30,000 from their traditional IRA into their Roth IRA. They have a 15% effective tax rate. They only have $1,500 in savings that could be used to pay the conversion taxes. They are planning on withholding the remainder of the taxes from the assets that are being transferred. How would you advise them? A: This client will need to pay $4,500 (15% x $30,000) in taxes. They only have one-third of that money in savings available to pay the conversion taxes. They cannot withhold money from their assets in the conversion process because this would be treated as a distribution. They should consider only converting $10,000 in the current tax year because they have enough in savings to pay taxes on this amount.
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  • Spring '14
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