Roth IRA Conversions
By Ward J. Wilsey, JD, LLM
3655 Nobel Dr. Suite 345
San Diego, CA 92122
(858) 764-2672
wardwilsey@wilseylaw.com

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

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

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

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

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

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

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

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

Who May Convert
 2010
 Anyone may convert, no income limits
 May pay the taxes over two years
 ½ 2011
 ½ 2012

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???

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

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

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

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

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

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???

Keep In Mind
 For Estate Planning Purposes:
 Best Scenario is Roth Conversion during lifetime
 Second Best is No Conversion
 Roth Conversion after Death???