John Bullis: ROTH IRA conversions using planning
You can convert your regular IRA to a ROTH IRA. The value converted is taxable income. If the value goes down after conversion, you can change your mind and cancel the conversion if you do it by Oct. 15 of the year following the conversion.
It’s called “Cherry Picking” that gives you the ability to convert to several ROTH IRA accounts and only choose to cancel the conversion on one or more of the new ROTH IRA accounts.
For example, suppose you have $100,000 in a regular IRA, consisting of $50,000 of stock in company A and $50,000 of stock in company B. In 2017, you could convert into two ROTH IRA accounts with all of the company A stock in one and all of company B stock in the other.
Then, by say Sept. 30, 2018, the value of company A stock is up to $60,000 and the value of company B stock is down to $40,000. You can keep the ROTH IRA with the company A stock and the value that’s taxed on your 2017 income tax return is only $50,000.
But the company B ROTH IRA can be “recharacterized” or canceled so it’s not taxable income to you on your 2017 return. Why pay tax on $50,000 when the current value is only $40,000?
Another example might be you have $150,000 in the regular IRA account, consisting of $50,000 of large company dividend paying stocks, $50,000 of foreign stocks and $50,000 of bonds.
You can convert in 2017 the regular IRA into three ROTH IRAs, one for each type of investment. Assume by Sept. 30, 2018, the large company stocks are worth $60,000; the foreign stocks are worth $40,000 and the bonds are only worth $40,000.
You could “recharacterize” the foreign stocks and the bonds if you do it by the deadline of Oct. 15, 2018, and not pay income tax on your 2017 return for $100,000. You could keep the large company stocks ROTH IRA, but only $50,000 (value at day of change into ROTH IRA) will be taxable income on your 2017 income tax return.
This is just another instance where understanding the rules and applying a little extra time to do something correctly will save you some tax.
Why not meet with your stockbroker and see what might be possible to consider doing ROTH IRA conversions. Then, meet with your CPA to be sure you understand what the tax might be for various choices.
Did you hear? “Life is a team sport. Sometimes you give and sometimes you get,” by Ann Pearson.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs