Name a common retirement plan that cannot be converted to a Roth IRA.
Only the traditional IRA can be directly converted to a Roth IRA. 401(k) and 403(b) accounts can be rolled over to a traditional IRA when changing jobs or retiring and thus, under certain circumstances, can be ultimately converted to a Roth IRA. Since Sec. 457 deferred compensation plans, for employees of state and local governments and non profit orgaizations, cannot be rolled over to a traditional IRA, these assets cannot be converted to a Roth IRA.
There is no need to review beneficiary designations (e.g., half to my spouse and half to my children equally) when converting to a Roth IRA.
False. According to Article V(3) of the IRS Model Roth Agreement which has been adopted by many plan custodians, the surviving spouse must be the sole beneficiary of a Roth IRA in order to be able to treat the account as her own. Therefore, it is probably wise to split the Roth IRA when there are multiple beneficiaries, one of whom is the surviving spouse.
The IRS has eased the rules on naming trusts as designated beneficiaries and it is now possible to name a by-pass trust as beneficiary without accelerating income recognition. Consult Prop. Reg. 1.401(a)(9)-1 Q&A D-5 as revised December 1997 or your tax adviser for details.
The IRS Restructuring and Reform Act of 1998 allows you to reverse a Roth conversion by the due date of your tax return. This removes the threat of taxes and penalties if you were to exceed the $100,000 conversion ceiling.
Converting an IRA to Roth can trigger alternate minimum tax (AMT.)
I have $50,000 in wages, $48,000 in interest from US Treasury securities and $5,000 in municipal bond interest. Can I convert to a Roth IRA? Oh, and I just received a state income tax refund check.
In this example, the wages and US Treasury interest count towards the MAGI but the municipal bond interest does not. Some or all of the tax refund counts if you itemized deductions in the prior year. So, whether you can convert comes down to how much of the refund ends up on line 10 of your tax return. This in turn depends on the size of the refund, the itemized deductions allowed in the prior year and any state income tax payments after December 31 for the prior year. Read IRS Publication 525 or ask your tax adviser to do the calculation for you.
Understand how the conversion ceiling is defined for your state income tax purposes. For example, California uses the federal MAGI. The good news is that the federal government and California use the same standard; the bad news is that items like Treasury interest and state tax refunds might disallow a conversion even though these items are not subject to California income tax. _________________________________ This summary is not a complete discussion of the issues nor is it a full recitation of state and federal tax laws and regulations. Review your personal circumstances with your tax adviser.The threat of state income tax may remain. California has not adopted this change as of 7/28/98, for example.
True. An AMT liability can arise when there are large state income tax payments. For example, a California resident with a $100,000 annual income who converts a $500,000 IRA in 1999 (when the tax cannot be averaged over four years) may discover that they are paying thousands of dollars of AMT on top of their regular tax in the year after conversion. It is often possible to eliminate the AMT liability by judicious scheduling of state tax payments. Saving tax dollars is a good reason to seek competent advice when planning a Roth conversion.
Federal law allows you to convert to a Roth IRA unless your modified adjusted gross income (MAGI) exceeds $100,000 or unless you are married and filing a separate return. MAGI is the entry on IRS Form 1040, line 32 less the Roth conversion income plus a couple of non taxable items. These special items are the interest on EE bonds used for education and certain foreign income if you are living abroad. The taxable portion of Social Security benefits and taxable distributions from pensions and IRAs count towards the MAGI. Appreciation of stocks or of an IRA or variable annuity does not count so long as you make no withdrawals.