Tax and estate planning for IRAs after TRA '97.

• Author: Keebler, Robert S.
• Position: Taxpayer Relief Act of 1997

An Analytical Perspective on the Opportunity to Convert Existing IRAs to the New "Roth IRA"

The heart of the Roth individual retirement account (IRA) is a nondeductible contribution followed by nontaxable withdrawals. The true benefit is a provision that allows a taxpayer to convert an existing IRA to a Roth IRA. The price of conversion is realizing the deferred income of the existing IRA ratably over a period of four years. To enjoy the four-year spread of income, the election to convert the IRA must be made by December 31, 1998. Conversion, without the four-year spread, will continue to be available after 1998.

Initial analysis indicates that the Roth IRA is a superior wealth creation vehicle when compared to the traditional IRA. The key factors will be the client's current income tax situation, his post-retirement tax situation and age. Generally, the younger the client and the larger his IRA, the more likely that an election makes sense.

One of the most important portions of this new law is the suspension of the age 70 1/2 required distribution rules. Taxpayers will not be required to take any distributions from a Roth IRA during their lifetimes.

The conversion right is only available to taxpayers with adjusted gross income of $100,000 or less. Roth IRAs may be rolled over at the death of one's spouse and a rollover IRA can be converted to a Roth IRA.

1998 and Future Income Tax Rates

If tax rates at retirement will be the same or higher relative to the tax rates at the date of the rollover, the Roth conversion election is likely to be advantageous. Further, if a client has net operating loss (NOL), investment tax credit (ITC) or charitable deduction carryforwards, the rollover election will be even more favorable.

The following are some of the important variables to the conversion decision:

* Does the taxpayer have special tax attributes available in 1998, 1999, 2000 or 2001? For example, a charitable deduction carryforward, an NOL carryforward, ITCs, etc.? The presence of these will help reduce the tax paid due to the conversion.

* Can the taxpayer make the conversion in 1998? A four-year spread over which to pay income tax is available in 1998.

* Does the taxpayer have adequate funds to finance his retirement? If so, the suspension of the minimum distribution rules at age 70 1/2 provides a considerable advantage of the Roth IRA.

* Will the IRA be passed through an estate? If so, the payment of income tax due to the conversion will reduce the amount of the taxable estate...