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Posted by joetaxpayer on January 3, 2008, 6:44 pm
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Gil Faver wrote:
> A blurb from one of my brokers has the following statement:
>
> "The Tax Increase Prevention and Reconciliation Act eliminates the modified
> adjusted gross income (MAGI) restriction in 2010 (currently $100,000) for
> Roth IRA conversion eligibility."
>
> Am I correct in reading that this has no effect until 2010? Am I correct in
> reading that this has eliminated ANY income restriction on converting to a
> Roth IRA?
> If so, what is the cost benefit analysis to converting maybe $200k to a Roth
> IRA, for a person with several hundred thousand in AGI?
Yes 2010, unless they change their mind.
An AGI of 'several hundred thousand' put one in the highest current
brackets, 33 or 35%. Likely, no benefit to conversion to a Roth.
The largest benefits of Roth use or conversion to Roth have to do with
taking income at a lower rate vs deferring at a higher rate. A typical
earner will retire in a lower tax bracket than while they worked.
The math shows that one can amass over $2 million and remain in the 15%
bracket at retirement.
There is a social security tax anomaly to be aware of, where one hits a
phantom rate on their SS benefits, as one half their SS benefit plus
their taxable income (as from IRA/401(k)) passes $32K for a couple.
This creates a pretty tight range of people impacted who can still avoid
this anomaly.
The conversion works well for a retiree who can use it to 'top off'
their current bracket each year so RMDs don't force them into a higher
bracket later on. Or, to execute a similar strategy while working if
one's income is variable, or during times of unemployment.
JOE
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