passive loss carry forward – Retirement Income Center

As is evident by the sheer number of blog posts to date about Roth IRA conversions – 33 – there’s a lot of things to consider when deciding whether a Roth IRA conversion makes sense for you. These include, but are not limited to, the following questions:

Should you do a Roth IRA conversion?
How much traditional IRA should be converted?
In which year(s) should a conversion be made?
Should you employ a multi-year conversion strategy, and, if so, what’s the best plan for you?
At which point during a particular year should a conversion be done?
Does it make sense to do multiple conversions in a single year?
Even though the income from a conversion in 2010 can be deferred to 2011 and 2012, should you do a conversion in 2010?
If you do a Roth IRA conversion in 2010, should you go with the default of reporting 50% of the conversion income on your 2011 tax returns and 50% on your 2012 returns or should you instead make an election to report 100% of your conversion income on your 2010 income tax returns?
Will your income tax rate be higher or lower than what it is now when you take distributions from your IRA accounts?
Which assets should be converted?
Should you set up multiple Roth IRA conversion investment accounts?
Is the current primary beneficiary of your traditional IRA a charity?
Are there retirement plans available for conversion other than active 401(k) plans?
What is the amount of projected income tax liability attributable to a potential conversion?
When will the tax liability attributable to the conversion need to be paid?
What sources of funds are available for payment of the tax liability?
Will withdrawals need to be made from the converted Roth IRA within five years of the conversion?
Do you have a life expectancy of five years or less with no living beneficiaries?
Do your itemized deductions and personal exemptions exceed your gross income such that you can convert a portion, or perhaps all, of your traditional IRA to a Roth IRA without incurring any income tax liability?
Do you own a rental property with a large passive activity loss carry forward that you can sell and do a Roth IRA conversion while incurring minimal or no income tax liability?
Is there a net operating loss that you can use to offset Roth IRA conversion income?
Is there a large charitable contribution available from the establishment of a charitable remainder trust that can be used to offset income from a Roth IRA conversion?
What is the basis of your traditional IRA, i.e., how much of your IRA has come from nondeductible IRA contributions or qualified retirement plan after-tax contributions?
Are you a surviving spouse in a low tax bracket who isn’t dependent on your IRA and one or more of your children are in a high income tax bracket?
What are the years and amounts of your projected required minimum distributions with and without a Roth IRA conversion?
What is the amount of projected taxable Social Security benefits that can be reduced by doing a Roth IRA conversion?
Do you have a SEP-IRA that can be converted to a Roth IRA?
Do you have a dormant 401(k) plan that can be converted?
How will a Roth IRA conversion affect financial aid qualification?
Will your Medicare Part B premium increase if you do a Roth IRA conversion?
If you do a Roth IRA conversion in 2010, will your Medicare Part B premium increase in more than one year?
What are the income tax consequences of a partial 72(t) Roth IRA conversion?
Should you not do a full Roth IRA conversion and instead leave funds in your traditional IRA for future nondeductible IRA contributions?

Feeling overwhelmed? Read Part 2 next week.

The last two blog posts, Three Roth IRA Conversion “Show Stoppers” and Clearing the Roth IRA Conversion Hurdles presented three scenarios in each post where the answer to the question, “Should you convert your traditional IRA’s to Roth IRA’s?” was a definitive “no” and “probably not a good idea,” respectively. Assuming that you weren’t eliminated from the Roth IRA conversion game by any of the three “show stoppers” and you cleared all three “high hurdles,” are you a candidate for a Roth IRA conversion?

Whenever you are evaluating candidates, whether it be for political office, employment, or some other situation, you always want to compare the individual against an established ideal candidate profile. In the case of a Roth IRA conversion, the ideal candidate is someone who will incur minimal or no income tax liability as a result of the conversion.

As emphasized in the last two blog posts, a Roth IRA conversion doesn’t have to be an all-or-nothing event – you can do partial conversions. It’s a rare situation when someone with a traditional IRA with a value of $100,000 or more will be able to convert 100% of it to a Roth IRA in a single year without incurring some income tax liability. It’s much more likely that the stars will align in such a way in a particular year that you will be able to convert a portion of your traditional IRA while incurring minimal or no income tax liability.

There are four situations that come to mind where it’s possible to convert a portion, and possibly all, of a traditional IRA to a Roth IRA while incurring minimal or no income tax liability attributable to the conversion. All four situations, in addition to assuming availability of a traditional IRA, require preparation of an income tax projection, including calculation of potential exposure to alternative minimum tax, or “AMT,” to determine the amount of the traditional IRA that should be converted to a Roth IRA to achieve this result.

This blog post will discuss the first two situations, with the second two the subject of next week’s post. The first two situations are as follows:

No current income tax liability without any tax losses
Sale of rental property with large passive loss carry forward and minimal capital gain and depreciation recapture

No Current Income Tax Liability Without Any Losses

You may be in a situation where your itemized deductions and personal exemptions offsets a large portion of your income, excluding losses, so that you aren’t subject to income tax liability. An example would be a retired individual who is less than 70-1/2 who isn’t receiving any sizeable pensions and is taking distributions from nonretirement investment accounts and/or nonqualified income annuities where a large portion of the payments are nontaxable and who also has enough itemized deductions to offset a large portion of otherwise taxable income. If you are in this situation and you have a traditional IRA, an income tax projection should be prepared to determine the amount of your traditional IRA that you can convert to a Roth IRA while still incurring no income tax liability.

Sale of Rental Property With Large Passive Loss Carry Forward and Minimal Capital Gain and Depreciation Recapture

You may own a rental property with a large passive loss carry forward that hasn’t appreciated much in value that you weren’t thinking about selling anytime in the near future. If you are in this situation and provided that a sale of the property won’t result in a large capital gain and ordinary income resulting from depreciation recapture, the sheltering of all of your income from use of your passive loss carryover resulting from the sale of your rental property may significantly reduce, or even eliminate, your income tax liability in the year of sale. If this is the case, an income tax projection assuming sale of the property should be prepared to determine the amount of your traditional IRA that you can convert to a Roth IRA and not incur more income tax liability than you would have incurred had you not sold the property.

If one of these two scenarios applies to you, have your CPA financial planner prepare an income tax projection for you. If the results show that you will incur minimal or no income tax liability in connection with a partial or full Roth IRA conversion, you may be an ideal candidate for a Roth IRA conversion.