||Ask the Dollar Diva
Roth conversions look good
Dear Dollar Diva,
I wanted to convert my traditional IRA account to a Roth IRA account
a while ago, but couldn't afford the $4,000 tax bite. The market
is down, and so is the value of my IRA. If I converted it now, the
tax bite would be affordable.
Are there any restrictions about converting it into
a Roth? I've heard that if our gross income is more than $100,000,
we can't do it. What's the story?
Converting a traditional IRA account to a Roth IRA
account when the market is down is a good idea. You pay less tax
because you're reporting less income; and you pay no income or capital
gains tax when the market bounces back in the future, because that's
what the Roth IRA is all about.
For more on the Roth IRA read the Diva's "Time
is on your side with a Roth IRA," "How
do Roth IRA contributions work?" and "Is
the Roth IRA too good to be true?"
There are only two restrictions that you have to worry
about when converting a traditional IRA to a Roth IRA:
Income limitation: If
the gross income reported on your tax return (not including
the conversion amount) is more than $100,000, you're not eligible
to do the conversion. $100,000 is the magic number whether you're
single or married, and it's not surprising that this income
limit penalizes a lot of hard working married folks.
Filing status: A taxpayer filing
"married filing separately" is not eligible to convert to a
Roth, regardless of how little his income is. Every other taxpayer
is eligible, as long as the gross income on his tax return is
To avoid getting thwarted by the marriage penalty,
a single taxpayer with a good job should consider converting his
traditional IRA to a Roth before he ties the knot.
For more details, read IRS "Publication 590, Individual
Retirement Arrangements (IRAs) (including Roth IRAs and Education
For every action there's a reaction
Converting a traditional IRA to a Roth IRA adds a
big chunk of taxable income to your tax return. The Diva reminds
you of the potential negative tax consequences you should look out
- Your marginal tax rate could jump into the
next bracket: current tax brackets range from 15 percent to 39.6
- Capital gains tax may jump from 10 percent
to 20 percent.
- Itemized deductions may be reduced or eliminated.
- Deduction for student loan interest may be
reduced or eliminated.
- Child tax credit and credit for higher education
tuition may be phased-out or eliminated.
- Exemptions for taxpayer, spouse and dependents
may be reduced or eliminated.
- Up to 85 percent of Social Security may be
For the nitty-gritty on how adjusted gross income
impacts your deductions and credits, read IRS "Publication 17, Your
Federal Income Tax, For Individuals."
-- Posted: Nov. 20, 2000