Monday, December 15, 2008


Here are some updates and additions to some of my recent posts.

(1) I discussed the details of converting a traditional IRA to a ROTH in the post “CONVERTING TO A ROTH IRA FOR 2008”.

I failed to mention that the taxable income reported upon the conversion of a traditional IRA to a ROTH IRA is adjusted by any “basis” in the traditional IRA.

What this means is that if you have made any “non-deductible” contributions to an IRA over the years part of the conversion will be treated as a tax-free return of “after-tax” contributions.

You would use IRS Form 8606 (Nondeductible IRAs) to determine the taxable amount of the IRA conversion. The non-taxable portion would be calculated in Part I and the taxable portion determined in Part II.

Taxpayers whose MAGI exceeds $100,000 in 2008 and 2009 can make a contribution to a traditional IRA for each year, which they either elect to or, because of circumstances, are required to treat as non-deductible. In 2010, when the $100,000 income threshold disappears, they can convert the traditional IRA to a ROTH and will only have to pay tax on the earnings from the traditional IRA for the two years.

This strategy assumes the above taxpayers have no other traditional IRA accounts either from previously deductible contributions or from 401(k) or other qualified rollovers). When calculating the “basis” in an IRA conversion the total of all traditional IRA accounts are taken into consideration.

(2) I mentioned in Saturday’s WHAT’S THE BUZZ about the pension technical corrections bill. Here is more info -

In one of its final acts of the year Congress has passed the Worker, Retiree, and Employer Recovery Act of 2008 (
H.R. 7327) which, among other things, suspends for 2009 the law under which people 70 1/2 and older must withdraw a minimum amount from their retirement plan or IRA. There will be no 50% penalty for failure to take a RMD for 2009.

To quote from the “Technical Explanation” prepared by the Joint Committee on Taxation –

Under the provision, no minimum distribution is required for calendar year 2009 from individual retirement plans and employer-provided qualified retirement plans that are defined contribution plans (within the meaning of Section 414(i)). Thus any annual minimum distribution for 2009 from these plans required under current law, otherwise determined by dividing the account balance by a distribution period, is not required to be made. The next required minimum distribution would be for calendar year 2010. This relief applies to life-time distributions to employees and IRA owners and after-death distributions to beneficiaries.”

The explanation adds that, “this provision does not apply to any required minimum distribution for 2008 that is permitted to be made in 2009 by reason of an individual’s required beginning date being April 1, 2009.”


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