Roth Conversion Planning for a Small Business Owner

Continuing with the discussion about Roth IRA conversions – and especially given that the income restriction will be lifted in 2010 – there is an opportunity for the small business owner or farmer that may be quite useful. Many small business owners and farmers have large Net Operating Loss (NOL) carryovers from previous years, due to the fact that NOL can only be deducted to the extent of the individuals’ Adjusted Gross Income. Excess NOL can be carried over for up to 20 years.

For the small business owner or farmer who has retired and closed his business, a large NOL can be difficult to utilize – especially if his income requirement is small in relation to the NOL. If the small business owner or farmer has an IRA, there is a unique opportunity to convert a portion of that IRA to a Roth IRA equal to the carried-over NOL, thereby converting the funds to a tax-free account with no tax owed.

The reason that this is important is because carried over NOL disappears when the taxpayer dies. If the NOL is large enough that normal income (or Required Minimum Distributions) doesn’t utilize the NOL completely, then this opportunity can help to create tax-free income for the taxpayer in the future.

Note: estates and trusts can also have NOL, but this provision is not pertinent to estates and trusts.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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  • Thanks, iettresning and informative.I am considering to leave IRA to trust to support my spouse if she survives me and then give it to my daughter. I am not too concerned about distribution rate as long as MRD is not more than the support for my wife.

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