Pages

Tuesday, April 28, 2015

Tax-free Roth Conversions - From The Boston Tax Institute

Lu Gauthier of the Boston Tax Institute  has given me permission to reproduce his email blasts.  BTI is a great value for live tax continuing professional education.  If you decided to contact BTI because you read about it here, be sure to mention it to Lu. It won't get you a discount or me a commission, but it will show him that this blogging thing is a thing.

Our thanks to Natalie Choate, Esq. for the following article!  Natalie will be discussing this and other exciting topics at her seminar on May 29 in Waltham!

Can You Do a Tax-free Roth Conversion?

If you have after-tax money in your IRA or in your qualified plan account, there is a brand new IRS-blessed safe opportunity to convert that money into a Roth IRA. The conversion would be "tax-free" because (since this is after-tax money we're talking about), you already paid income tax on it.
The debate rages about whether Roth conversions are "worth it." If all the assumptions work out right, converting your traditional plan or IRA to a Roth IRA could be a great move. But if the assumptions don't work out? Like if your future tax bracket goes down instead of up, or your investments plunge in value, or the government changes the rules on us? A Roth conversion could be a disaster!

Well here's a Roth conversion "no-brainer." If you ALREADY have after-tax money in your plan or IRA, and you can safely legally and easily move that money into a Roth IRA, you have nothing to lose. You get a Roth IRA for an additional investment of....zero! So the future gains will be tax-free, and there will be no required distributions during your lifetime...but if something goes wrong, it didn't cost you anything so there will be no regrets.

Unfortunately not everybody can take advantage of this conversion nirvana. In order to do the tax-free Roth conversion, you must meet both of the following conditions:

You participate in a qualified retirement plan (QRP), such as a 401(k), 403(b), pension or profit-sharing plan, or Keogh plan.

You have after-tax money in a qualified plan (such as a 401(k)) or in a traditional IRA.
Since most people do not have after-tax money in their IRAs or retirement plans, right off the bat we know most people will not be able to use the "tax-free Roth conversion." But if you do happen to meet those two conditions, here is how to convert your after-tax money to a Roth IRA tax-free.

If your after-tax money is in the QRP:

When the time comes to take a distribution from your QRP (perhaps because you're retiring for example), you are entitled to direct the plan administrator to send your plan money via direct transfer (called a "direct rollover") to an IRA. So you open a traditional IRA and a Roth IRA. And you direct the plan administrator to send your pretax money via direct transfer into the traditional IRA (to continue deferring income tax on that money), and to send the after-tax money via direct transfer into the Roth IRA. Voila, a tax-free Roth conversion has taken place.

 Natalie will be discussing this and other scintillating topics at her seminar on 05/29 at the Hyatt house in Waltham.

Natalie's discussion at the beginning of the problems with converting taxable IRAs to ROTH is a mild version of my own view of that concept.  I always thought of it as hitting your head against the wall because it feels so good when you stop. - PJR

Peter J Reilly CPA  hopes to be the first tax blogger to give up his day job.  Quality content that costs him no money or effort is an integral part of his plan.


No comments:

Post a Comment