My tax tip for the day (roth conversions)

[Willie99]

You have until 10/15/2009 to simply "undue" any 2008 IRA conversion.

If you converted a traditional IRA to a Roth in 2008, you have to recognize such as income on your 2008 tax return. If you are invested in the market, your IRA is worth less today than when you converted.

So here is the strategy, undue your 2008 conversion and don't pay taxes on the larger amount. Wait for 30 days and reconvert your IRA in 2009. Now you'll be paying taxes on a smaller amount one year later.

 

[D2bets]

How many people here do you think actually converted a traditional IRA to a Roth IRA and paid the tax? I would guess 0. But if someone did, you're right, undoing it would be the way to go. Not only that, but there is a 100K income limitation on the conversion, so people who could actually afford to convert, can't.

That changes in 2010 when the income cap will be lifted and the tax on conversion spread over 2 years.

I have Roth IRA's now that may never be in the black. What the hell should I do, other than cry?

 

[ElTaino]

Thanks for the heads up! willie, while we are on the subject of taxes, because i am single and no kids i get raped. with my roth maxed already, im thinking about a 457. do you think it will make a substancial enough difference when i file next year? or should i invest it elsewhere (not in a home)?

 

[Willie99]

How many people here do you think actually converted a traditional IRA to a Roth IRA and paid the tax? I would guess 0. But if someone did, you're right, undoing it would be the way to go. Not only that, but there is a 100K income limitation on the conversion, so people who could actually afford to convert, can't.

That changes in 2010 when the income cap will be lifted and the tax on conversion spread over 2 years.

I have Roth IRA's now that may never be in the black. What the hell should I do, other than cry?

Actually, more people have converted than you think, and do so every year. This is an unusual year with respect to a decline in value making an undue a must due.

Of course, 2010 is a game changer with respect to conversions.

If you completely liquidate your Roth, you can write your net loss off as an itemized deduction.

 

[Willie99]

Thanks for the heads up! willie, while we are on the subject of taxes, because i am single and no kids i get raped. with my roth maxed already, im thinking about a 457. do you think it will make a substancial enough difference when i file next year? or should i invest it elsewhere (not in a home)?

It's always smart to save something, so putting some money in a 457 is a good thing. However, since your withholdings will decrease accordingly, it probably won't change the net result of your tax return, although it will result in a lowering of total taxes.

 

[D2bets]

Actually, more people have converted than you think, and do so every year. This is an unusual year with respect to a decline in value making an undue a must due.

Of course, 2010 is a game changer with respect to conversions.

If you completely liquidate your Roth, you can write your net loss off as an itemized deduction.

Let me ask you about that. It's an itemized deduction but isn't it subject to a floor or some other limitations. I had it in my mind for some reason that I couldn't actually deduct it. Let's say I had contributed 10K to a Roth and now it's worth 5K. I liquidate all of it. Can I actually use the 5K loss as an itemized deduction like I would for mortgage interest? I mean, let's say this is December....I could liquidate the Roth, take the loss, and then put the 5K back in January for next year's contribution? Might be a good thing?

 

[Willie99]

Good strategy

The loss does have to exceed 2% of your AGI

If your AGI is 100k, and your loss is 5K, you can deduct 3k.