Dear Dr. Don,
I have $300,000-plus in CDs in three different banks, all invested in regular IRA accounts. I am considering converting them to Roth IRA CDs and want to know if that is routine, or does it create some issues? I’m 67 but I do not have a need to draw on the accounts at this time.
— Bill Deposits
It’s involved, but it’s routine. Let’s call it an involved routine. First of all, there are some income limitations on your ability to convert a traditional IRA to a Roth IRA in the 2009 tax year. Those income limitations are eliminated in the 2010 tax year, so if you don’t qualify for conversion in 2009, you will in 2010.
Here’s the 2009 tax year language from the IRS Publication 590, Individual Retirement Accounts:
Converting From Any Traditional IRA Into a Roth IRA
You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.
- Your modified AGI for Roth IRA purposes (see Modified AGI in chapter 2) is not more than $100,000.
- You are not a married individual filing a separate return.
Note: If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.
I recommend that you work with a tax professional in determining the timing of any conversion and whether you should convert. Waiting until 2010, for example, gives you the ability to spread the income tax hit out over two years on the conversions.
Tapping financial resources other than your IRA account to pay the income taxes due from the conversion will allow you to keep more money invested in the Roth IRA accounts.
You haven’t discussed the terms of the CDs in the traditional IRA accounts. You’d want to discuss with the banks their policy on any penalties for early redemption on the CDs.
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