1. Roth IRA Conversions
By Ward J. Wilsey, JD, LLM
3655 Nobel Dr. Suite 345
San Diego, CA 92122
(858) 764-2672
wardwilsey@wilseylaw.com
2. Ward J. Wilsey, JD, LLM
BA in Economics from UCSD
JD from University of San Diego
LLM in Taxation from Washington University in St. Louis
Estate Planning Attorney with the Wilsey Law Firm
Frequent lecturer with several providers of continuing legal
education for attorneys, including the National Business
Institute
3. Roth IRA Overview
Roth IRAs are treated exactly like regular IRAs
Except for where the Internal Revenue Code specifies
Three main advantages
Distributions are Tax Free
No Required Minimum Distributions (“RMDs”)
No Maximum Age for Making Contributions
Disadvantage
Cannot Deduct Contributions
4. Minimum Distributions Rules for Roths
No Lifetime Required Distributions
408A(C)(5)
Post-Death RMD rules do apply
Reg. § 1.408A-6, A-14(b)
Roth distributions and conversions do not fulfill MRD
requirements for a traditional IRA
Reg. § 1.408A-6, A-15
5. Roth Distributions
Qualified Distributions are Tax Free if they meet two
requirements:
Five Years after first contribution
§ 408A(d)(2)(B)
And one (or more) requirements of § 408A(d)(2)(A) are met:
After Age 59.5
After Participants death
Attributable to Participant being disabled
6. Ways to Fund Roth IRA
Regular Contributions
Less of Contribution or the applicable dollar limit
§ 408A(C)(2)
Less Traditional IRA Contributions
Applicable Dollar Limit
Year Dollar Limit Add on Over 50
2002-2004 $3,000 $500
2005 $4,000 $500
2006-2007 $4,000 $1,000
2008-2010 $5,000 $1,000
7. Income Limits for Contributions
2009
Single Income Limit of $105,000 MAGI
Phase-out to $120,000
Married Income Limit of $166,000 MAGI
Phase-out to $176,000
Basically no contributions for Married filing separately
8. Rollover Roth IRA
Transfer Funds from Traditional IRA
Amount includible in gross income
§ 408A(d)(3)(A)-(C)
Three Ways (§408(d)(3)(A)(i))
Cash from Traditional contributed to Roth within 60 Days
Plan to Plan Rollover
Re-designated by Custodian
9. Who May Convert?
2009
Income Limit of $100,000
No age requirement
Watch out for paying taxes with IRA if under age 59.5, 10% early
withdrawal penalty
MAGI (Modified Adjusted Gross Income) (See generally §219)
Start with Adjusted Gross Income
Certain income normally excluded in added in and certain deductions
are not allowed
i.e. IRA Contributions
10. Who May Convert
2010
Anyone may convert, no income limits
May pay the taxes over two years
½ 2011
½ 2012
11. Mathematics of a Conversion
Example
Joe has $500,000 IRA growing at 8%
$500,000 of non-qualified liquid assets growing at 6%
Difference in growth rates used to reflect lack of income taxes
affecting IRA growth
Age 50
Convert or no Convert???
12. Comparison in 2030
Conversion No Conversion
Joe converts $500,000 IRA to Roth Joe doesn’t convert
IRA and pays the taxes with Non- After in 2010
IRA assets
Taxes of $225,000 state and Roth IRA worth $500,000
federal growing at 8%
Liquid Assets now worth
After in 2010
$500,000 6%
Roth IRA worth $500,000
growing at 8% In 2030
Liquid Assets now worth Roth IRA worth $2,330,478
$275,000 6% Non-Qualified worth
In 2030 $1,603,567
Roth IRA worth $2,330,478 Total is $3,934,046
Non-Qualified worth $881,962 Increase reflects built in Capital
Gains Tax Liability
Total is $3,212,440
13. Conversion
These are almost equal accounting for taxes
The big deal is if taxes raise in the future, since distributions
will be taxed at a higher tax
Although the conversion is a bust from the IRA owners
perspective if tax rates lower in the future
14. Comparison in 2050
Conversion Non-Conversion
IRA $10,862,260 IRA $3,777,396
Non-Qualified $2,828,572 Non-Qualified of
Total of $13,690,833 $5,142,858
Reinvested RMDs (now
non-qualified of
$4,020,364)
Total of $12,940,620
Decrease reflects that taxes
were paid on RMDs
15. Beneficiary 50 Year Old
Conversion Non-Conversion
IRA worth $10,862,260 IRA worth $3,777,396
By age 85, the Beneficiary By age 85, the Beneficiary
will have $60,097,460 in will have $11,494,527 in
distributions distributions
$2,828,572 in non- $5,695,259 in non-
qualified assets qualified assets
Assume all growth and Assume all growth and
income is distributed income is distributed
$11,180,310 by age 85 $18,110,433 by age 85
$71,277,770 total $29,604,960 total
16. Bottom Line
If Conversion Occurs, Inherited Roth IRA is far preferable
If wealthy clients have IRA or 401K that they don’t need,
and have sufficient liquid funds for conversion, they should
probably do it
17. Roth Conversion Option 3
Conversion occurs after clients death
Internal Revenue Notice 2008‐30 allows for a Roth
Conversion to occur after a clients death
Make sure the numbers work
You are using Non-Qualified Assets to pay taxes
Life Insurance???
18. Keep In Mind
For Estate Planning Purposes:
Best Scenario is Roth Conversion during lifetime
Second Best is No Conversion
Roth Conversion after Death???