2010 Roth Conversion question & 2011 impact

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prestocj
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Joined: Thu Apr 02, 2009 8:15 am

2010 Roth Conversion question & 2011 impact

Post by prestocj » Tue Dec 22, 2009 12:52 pm

Without getting into the details and history I currently have 3 different Total Bond Index funds so I can manage my asset allocation.

Fund #1: Roth IRA - converted a traditional to Roth back in the early 90's before I become a "high income earner" and could no longer contribute. Have not contributed to this since converting.

Fund #2: Traditional IRA (pre-tax dollars) - rollover from a 401K plan back in early 2000. Have not contributed to this since the rollover

Fund #3: Traditional IRA (post-tax dollars) - today I max out my current 401K plan and due to income I contribute post tax dollars to this fund on a yearly basis to manage my stock/bond asset allocation.

My plan in 2010 is the following:

1. Make my 2010 post tax dollar contribution to Fund #3 as usual
2. Convert Fund #2 into a Roth IRA and "merge" it with Fund #1.
3. Convert Fund #3 into a Roth IRA and "merge" in with Fund #1/#2

This would then allow me to reduce the number of Total Bond Index Funds from 3 different funds to just 1 fund (easier to manage and less documentation)

My three questions:
1. For Fund #2 (pre-tax dollars) I would need to pay taxes on this fund when I convert, correct?

2. For Fund #3 (post-tax dollars) I would NOT need to pay any taxes on this fund when I convert because taxes have already been paid, correct?

3. So what happens in 2011 when I go to make my 2011 post tax contribution? Can I make the contribution to the Roth IRA or will I need to open up another Traditional IRA because I'm a "high income earner"? So in the end I'll end up with 2 different Total Bond Index Funds - one is the Roth (which will now consist of Funds #1, #2, #3) and the other which will be another Traditional with post tax contributions?

Was unclear whether the rule that was allowing high income earners to convert to a Roth in 2010 would also allow us to contribute to that same Roth after 2010.

Thx for your help!

ruud
Posts: 134
Joined: Sat Mar 03, 2007 1:28 pm
Location: san francisco bay area

Post by ruud » Tue Dec 22, 2009 1:04 pm

you can't separately convert pre or post tax dollars.

from fairmark:
Q: Can I convert just the nontaxable part, and leave the taxable part in my regular IRA?

A: No, your conversion distribution will be treated as partly taxable and partly nontaxable, even if you try to roll only the nontaxable part.

Q: What if I have more than one traditional IRA? Can I convert one but not the other?

A: Yes, but when you determine how much of your conversion distribution is taxable, you're required to treat all your traditional IRAs as if they were one big IRA, so you don't get any advantage if you take the distribution out of the IRA that has the most nondeductible contributions.
"A good plan, violently executed now, is better than a perfect plan next week."

kaneohe
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Joined: Mon Sep 22, 2008 12:38 pm

Post by kaneohe » Tue Dec 22, 2009 1:06 pm

If you have a mixture of pre- and post-tax IRAs, when you convert any funds, you pay tax on a proportion of the conversion no matter which IRA the funds come from. IRS considers you to have one big IRA and funds withdrawn have a mixture of pre- and post-tax in proportion to their mix in the IRAs.

I think the 2010 change affects just the rule affecting conversion, not contributions, so if you make too much to make contributions to Roth directly you need to go thru the intermediate step of the IRA.

Default User BR
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Joined: Mon Dec 17, 2007 7:32 pm

Post by Default User BR » Tue Dec 22, 2009 6:54 pm

ruud wrote:you can't separately convert pre or post tax dollars.
Right, but that's not what was specified. If I read it right, the plan is to convert the total amounts of both TIRAs.


Brian

Default User BR
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Joined: Mon Dec 17, 2007 7:32 pm

Re: 2010 Roth Conversion question & 2011 impact

Post by Default User BR » Tue Dec 22, 2009 7:02 pm

prestocj wrote:Without getting into the details and history I currently have 3 different Total Bond Index funds so I can manage my asset allocation.
For me, that wouldn't be a driving reason to do the Roth conversion. Who cares if there are three funds? What is your tax situation? How much will you pay on converting the pre-tax money?

There is a trick that you can use to separate taxable and non-taxable money in an IRA if you have a cooperative 401(k) or other qualified plan. That involves doing a rollover from the IRA into the QP. The rules specify that only taxable money can be treated this way, and is a specific exemption to the pro-rata distribution rule. The next year the money can be rolled back out.

All that requires a QP that allows incoming rollovers from IRAs, and in-service rollovers back out of rollover contributions. Or you could leave it in the QP if it's a good plan.



Brian

ruud
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Location: san francisco bay area

Post by ruud » Tue Dec 22, 2009 7:05 pm

Default User BR wrote:
ruud wrote:you can't separately convert pre or post tax dollars.
Right, but that's not what was specified. If I read it right, the plan is to convert the total amounts of both TIRAs.
from the link i posted:
Q: What if I have more than one traditional IRA? Can I convert one but not the other?

A: Yes, but when you determine how much of your conversion distribution is taxable, you're required to treat all your traditional IRAs as if they were one big IRA, so you don't get any advantage if you take the distribution out of the IRA that has the most nondeductible contributions.
--ruud
"A good plan, violently executed now, is better than a perfect plan next week."

TStockmann
Posts: 23
Joined: Tue Dec 01, 2009 6:42 am

My answers

Post by TStockmann » Wed Dec 23, 2009 4:22 pm

1. For Fund #2 (pre-tax dollars) I would need to pay taxes on this fund when I convert, correct?
Not entirely: taxes on the 2010 conversion can be spread over 2 years (2010 and 2011).
2. For Fund #3 (post-tax dollars) I would NOT need to pay any taxes on this fund when I convert because taxes have already been paid, correct?
You would still need to pay tax on any gains above your contributions.
3. So what happens in 2011 when I go to make my 2011 post tax contribution? Can I make the contribution to the Roth IRA or will I need to open up another Traditional IRA because I'm a "high income earner"? So in the end I'll end up with 2 different Total Bond Index Funds - one is the Roth (which will now consist of Funds #1, #2, #3) and the other which will be another Traditional with post tax contributions?
If the current law does not change, you would need to make the contribution to a traditional IRA and then convert it. If you're concerned about the number of retirement accounts you have and are indifferent to the possibility of recharacterization in the event of a subsequent loss, you can move it into the Roth you are creating. I would suggest you leave Fund #3 open with a zero balance and use that as the vehicle next year.

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