Converting Qualified Monies to Roth IRAs

The following considerations should be weighed before converting qualified monies to Roth IRAs.

1) You need to determine your adjusted gross income (AGI) and, for some, your modified adjusted gross income (MAGI) after applying all your exemptions, deductions and tax credits. Once you determine your AGI or MAGI, you need to figure your top bracket of taxable earnings and investment income. As an example: A married couple has calculated that their AGI is $76,500, at the lower end of the 25% tax bracket. They should determine if they have any further deductions that can lower their AGI below the $75,900 the top of the 15% tax bracket. After reviewing every legal deduction the couple’s tax accountant found additional write offs that lowered their AGI down to 72,500. This gave them some “head room” in the 15% tax bracket to convert $4,000 a year from their traditional IRA to a Roth IRA at 15% tax. It’s estimated that it would take them about 12 years to convert their traditional IRA to a Roth IRA. But that assumes no increase in income or tax law changes. But the conversion is warranted. It makes math sense. But if they were unable to find additional deductions they would be converting their traditional IRA at the 25% tax bracket with “head room” to $153,100. In theory, with the facts remaining static, they could convert the entire amount in one year. The time and tax bracket needs to be discovered to determine the best approach to the conversion and the “recapture” of taxes paid during retirement.

2) All qualified plans are taxed at ordinary income tax rates. All qualified plans are subject to required minimum distributions and the punitive penalties for non-compliance. All qualified plan distributions are included in the provisional income test for Social Security benefit taxation. If you can determine a good faith estimate of what your effective tax bracket will be during retirement and factor in the annual tax bill including Social Security benefit taxation, then you can weigh the economic value of the conversion or recapture of conversion taxes. Converting qualified monies requires basic economic sense and the time to amortize the conversion cost. The math always is the determining factor.