The Magic of a Roth IRA Conversion

Last year I suggested clients talk to their CPAs about the costs of transferring some money from their traditional IRAs into a Roth IRA, because the IRS was going to allow transfers done in 2010 to have the tax on the transfer spread over 2 years.

I see all clients 1 to 4 times a year depending on need and the amount of assets I am managing for them. When I meet with clients along with my normal investment report I have a 2 page sheet showing my concerns and thought about the recent past and coming year. The following is an excerpt from one of today’s client meetings.

2. Last year we transferred $12,978 from your IRA Rollover to your Roth IRA. This year your CPA said to move $25,956 from your IRA Rollover to your Roth IRA. We transferred shares (to keep trading costs down) and got a little more than we wanted, $27,883.83. You will be paying taxes on this over a 2 year period of time and this may cause you to pay taxes on and extra $963.92, each year. The extra tax should be approximately $96.39, each year.

3. We transferred this money into your Roth IRA because it will grow tax free, but come out of the Roth IRA tax free; rather than 100% taxable which would be normal when money comes out of an IRA Rollover. The amount to roll over was figures in such a way that you probably will not have to pay any tax on the money transferred. If calculated correctly you transferred money from an account that is 100% taxable when money is removed, into an account that is 100% tax free when money is removed and did not have to pay any tax on the money we transferred. Now that is real MAGIC if it works out correctly.

About the author

Ted Feight, CFP®
Ted Feight, CFP®

I have been an asset, financial, life and wealth manager for 36 years. During that time the profession has been in a state of rapid evolution. What my core clients expect of me today is very different from what they expected 36 years ago When I started, clients were just beginning to invest and had little. Now many are near and or are retired, and have accumulated a great deal.
I believe I have given my clients peace of mind and comfort that occurs when they have had a trusted relationship with someone for many years. What keeps my clients coming back to us is not product, but the confidence that someone is looking out for their best interest, listening to what they are saying and serving as a partner in helping them get where they want to be. Who else has asked the questions about who they are, where do they want to go, and what drives them? I have been my clients' sounding board, confidant, coach, guru and in the end the stronger the relationship we have had, the greater were their successes. We do not always have the "Be your client's best friend" type of relationship but, in the end, I want to be their "go to" guy when they need questions answered or need help.

2 Comments

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  • To give you a good answer I would have to see your taxes from last year, know what your income is going to be this year and look at your IRA account.

    What you really need to do is ask this question of your CPA. I work very closely with client’s CPAs in figuring this type of thing out. Every client is different.

  • I am trying to determing if the value of a rollover IRA that is converted into a Roth IRA is used in determining your MAGI. My goal is to keep our MAGI under $170,000 so we do not have to pay additional premiums for out Medicare insurances.

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