Monday, November 24, 2008

NOW HERE'S A THOUGHT

The "Money Hotline" column on the front page of the December issue of BOTTOM LINE WEALTH (formerly TAX HOTLINE) provides some good advice from Seymour Goldberg, Esq, CPA. The third item begins – “Now is an ideal time to convert a traditional IRA to a ROTH IRA”.

Goldberg points out that because of the current mucking fess of an economy the balance in your traditional IRA may be substantially down, and therefore “the amount subject to income tax at the time of the conversion will be lower that it would have been before”. So you will pay less current income tax on the conversion.

As you are taxed on the amount of the conversion (i.e. the value of the traditional IRA account at the time of the transfer) you want to convert, if you can, at the point at which the value of the investments in the traditional IRA account are at their lowest.

To add to what Seymour said, when converting you can invest the ROTH account monies in the exact same investments that had previously existed in your traditional IRA account. It is as if you did not touch the investments – but let them sit and eventually go back up as the market gets better. Of course you can also use the opportunity to change your investments once the money has been transferred to the ROTH.

The column points out that in order to convert a traditional IRA to a ROTH IRA “you must have modified adjusted gross income of $100,000 or less”.

For ROTH contribution or conversion purposes the MAGI begins with your AGI without the conversion amount and adds back any –

* deduction for traditional IRA contributions,
* deduction for student loan interest,
* deduction for qualified tuition and fees,
* deduction for “domestic production activities”,
* exclusion of foreign earned income and foreign housing allowance,
* exclusion of US Savings Bond interest used for education, and
* exclusion of employer-provided adoption benefits.

The FU-ed economy may provide an added hidden bonus by reducing your income such that your MAGI will fall below $100,000 and allow you to convert.

TTFN

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