Academic journal article Journal of Accountancy

New Roth IRA Conversion Rules

Academic journal article Journal of Accountancy

New Roth IRA Conversion Rules

Article excerpt

Taxpayers with earned income have until April 15, 1999, to open a Roth IRA and have it count as starting on January 1, 1998.

Taxpayers who already have a traditional IRA can convert part or all of it to a Roth IRA if their adjusted gross income doesn't exceed $100,000. The converted amount would be included in their current income.

The taxable conversion is reported on Form 8606, Nondeductible IRAs, and attached to form 1040. These conversions are especially attractive for taxpayers who would like to leave their IRAs to their heirs and who have non-IRA money available to pay the taxes due on the conversion.

In 1998, in an attempt to save taxes, some taxpayers engaged in sequential conversions and reconversions. For example, assume that in 1998, a taxpayer converted a traditional IRA to a Roth IRA when the account was valued at $400,000. Then the stock market dropped, and the account value fell to $250,000. The taxpayer transferred the balance back to a traditional IRA and subsequently reconverted the funds into another Roth. As a result, the taxpayer was able to save taxes in 1998 by being taxed on only $250,000 instead of $400,000.

To close this loophole, the IRS issued Notice 98-50 (1998-44 IRB). The new rule limits reconversions to one on or after November 1, 1998, but on or before December 31, 1998. In addition, the rule permits only one reconversion in 1999.

If a taxpayer ended 1998 with a Roth IRA and the stock market takes a dive in the early part of 1999, he or she has until April 15, 1999, to close out the Roth and establish a traditional IRA. …

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