To Rollover or Not To Rollover

One of the most important decisions to be made concerning your Individual Retirement Accounts will be whether to roll your existing IRA into the new Roth IRA or not. The answer depends on your individual circumstances and may require some “number crunching”. In order to roll your regular IRA into a Roth IRA you must receive less than $100,000 of income in 1998. This limit does not include the amount you wish to rollover. Self-employed persons and owners of closely held businesses should begin planning now so that they would net less than $100,000 in income for 1998 and thereby qualify for the rollover treatment.

The graph illustrates the advantage of making the rollover to the Roth IRA. The graph represents the difference in value between a Roth IRA and a regular IRA after adjustments for taxes. Also notice how the benefit increases over time.

“What is so good about the Roth IRA”, you wonder. When you take money out of the Roth IRA (presumably you are retired or over age 59 �), the money is not taxed at all. You can remove both the principal and the earnings free of federal taxes. Some states may not follow the federal government’s lead. Also, there is no required minimum distributions at age 70 �. You can leave the money in the Roth IRA indefinitely. Remember, you are paying the taxes on the IRA now, instead of later in life.

“How does this work?”, you ask. You would decide to roll all or some of your current IRAs into your new Roth IRA account. The amount that you roll will be subject to income tax at your current rate. However, only for rollovers done in 1998, you will be taxed on one fourth of the rollover amount each year for a four-year period. Here is an excellent chance to rollover your IRA and delay paying some of the taxes for four years.

What are some of the reasons or circumstances that would make the rollover worthwhile?

  • You have money from other non-IRA accounts that you can use to pay the taxes.
  • You have at least five years before you need to make withdrawals from the Roth IRA.
  • You are near retirement and are currently in a lower tax bracket than you expect to be during your retirement years.
  • You expect to have quite a few years of withdrawals from your Roth IRA. (This is the point at which we have to crunch the numbers.)
  • You are young and have many years until retirement.
  • Your estate is already above the $600,000 level and your IRA would be subject both to federal income taxes to your beneficiaries and federal estate taxes to your estate.
  • You have enough other retirement savings on which to draw and wish to delay withdrawals from your IRA longer than age 70 �.

When should I make the rollover? For those who are very close to the $100,000 income limitation, you should make your decision later in the year. By that time you should be able to predict your total 1998 income. You want to avoid a situation where you elect to make the taxable rollover only to find out that you did not meet the income limitation and have to reverse the rollover at the end of 1998.

Our analysis shows that the rollover to the Roth IRA works better if you do not use any part of the rollover amount to pay the taxes. So plan on paying the taxes from other sources. Waiting until later in 1998 will also avoid the need to make four quarter’s worth of estimated tax payments. If you rollover after September 30, 1998, you will not have to make your estimated federal tax deposit until January 15, 1999.

All is not completely clear regarding these Roth IRA’s. For example; which states will follow the federal law? Will the Roth IRA distributions always be tax-free? (Social Security benefits had always been tax-free until recently.)

BWFA is prepared to help you make this decision. We have acquired software to help us crunch the numbers. We expect to address the rollover issue during your normal tax preparation appointment this Winter. If you do not currently have your taxes prepared by BWFA, please schedule an appointment for us to discuss this complex opportunity.