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.