Slott Report Mailbag: Am I "Over Qualified" to Convert My 401(k) to a Roth IRA? | Ed Slott and Company, LLC

Slott Report Mailbag: Am I "Over Qualified" to Convert My 401(k) to a Roth IRA?

This week's Slott Report Mailbag talks about Roth IRA conversions, how they are taxed and whether President Obama's budget proposals would cap Roth IRAs. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Hello Mr. Slott,

We are looking to convert an IRA to a Roth IRA. I took a loss on a variable life policy that was converted to an annuity. Can we use that loss to offset the tax due on a Roth conversion?

Answer:
The conversion to the Roth IRA is taxed as ordinary income. Please talk to a tax advisor or insurance professional with respect to whether or not you can deduct a loss on a variable life policy.

2.

Hello Ed,

I have been self-employed for over three decades and have made yearly maximum contributions to my 401(k) plan. I am now required to take yearly distributions, and in addition to continuing full-time employment, the taxes are killing me. It is my understanding that I am "over qualified" income wise and unable to set up or roll over into a Roth IRA.

What can I do to reduce my taxes?

P.S.

Death is not an option!

Kindest Regards,

Roger Posch

Answer:
Everyone is now eligible to convert funds to a Roth IRA. There are no longer income limits to do a Roth conversion. You should consider rolling over (converting) your 401(k) funds to a Roth IRA. All funds, except any 401(k) minimum distributions, are eligible to go into the Roth IRA. While the conversion will be taxable, the future withdrawals from the Roth IRA won’t be, if certain rules are met. Also, there are no required minimum distributions from a Roth IRA.

3.

I am unclear on the President's proposal to 'cap IRAs.' I see no reference to Roth IRAs where taxpayers have already paid full federal and state income taxes. Is he proposing to reverse or 'go back' on earlier promises of tax-free withdrawals from Roth IRAs?

Thank you,

Hugh Ditzler

Answer:
As part of the President’s fiscal year budget, he proposed limiting IRAs and employer retirement plans to a certain level based on a formula. That level is approximately $3 million. It is too early in the process to clarify any budget proposals. Also Congress has different ideas that will compete with the President’s proposals.
 


-By Joe Cicchinelli and Jared Trexler

 

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