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.