Planning for 2010 and Roth IRA Conversions

TheMetetron · #1 10-15-2007, 01:35 PM

I was hoping to get some dialog going on this before I go to a tax adviser to hammer out the details. Also, the nature of poker professionals with SEP-IRAs add in some complicating factors.

As many of you already know, in 2010 the conversion rules will be changing for Roth IRAs. Prior to 2010, if you made over $100k in a year, you couldn't convert traditional IRAs (which I believe include SEP-IRAs) to Roth IRAs; if you made less you could.

In 2010, the income limit to be eligible for conversions will disappear completely, meaning that anyone can convert their traditional IRAs to Roths. This has a lot of high-income people excited at the possibility of locking away money tax-free and without minimum required distributions. Roth money (nominal amount invested) can also be withdrawn any time without penalty, except the obvious loss of compounding; this gives some wiggle room in emergencies.

So my question is, how does this affect poker players such as myself who are normally locked out of contributing to Roth IRAs? Is it wise to start maxing out traditional + SEP IRAs with the plan to convert the whole thing in 2010 (and with taxes on that being half deferred to 2011 and half to 2012!).

There are complicated rules if you don't convert your entire traditional IRA that may mess up it being a smart move for some people, possibly including those with SEP IRAs.

I also can't seem to find the contribution limits to non-deductible traditional IRAs? Anyone?

FWIW, by 2010 I'll have over $200,000 in my SEP-IRA plus whatever the maximum traditional IRA contributions would be. Would it be wise to follow this plan and convert the whole thing in 2010? What do I do after 2010? Keep converting the ~$45k I can put in my SEP-IRA every year along with the traditional money? I assume at some point congress is going to close this loophole.

Also, there is the possibility that someday Roth withdraws will be taxed... would converting everything be a horrible idea in case that happened? But only converting say half would have screwed up tax implications that make the deal pretty sour.

Thanks for any input you guys have on the subject as all I've done so far is read a few articles and I'm sure some of you know even more than I do. For those that had no idea about this, perhaps it will help you out.

TheMetetron · #2 10-15-2007, 01:38 PM

Also the page below is pretty good for finding out stuff about Roths.

http://www.fairmark.com/rothira/decide.htm

TheMetetron · #3 10-15-2007, 06:13 PM

Bump. Anyone have any idea about this?

prohornblower · #4 10-15-2007, 06:26 PM

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Also, there is the possibility that someday Roth withdraws will be taxed... would converting everything be a horrible idea in case that happened?

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I don't see how those monies could be taxed in the future, but we are talking about the US government here...

My concern is more along the line of the weakening US dollar. I've maxed out my Roth for 2006 and 2007 (also have more in 401k that I plan on converting next year when I leave my job. Paying taxes now, since I have the money, seems to be the best idea. People seem to think the tax rate will go up in the future.

But aside from that...what if the dollar is much weaker against the global economy in the future? If that were the case, wouldn't it be better to pay taxes in the future and not now? (Or is it all relative?) In other words, the tax money we pay now may be worth more against the global economy than the taxes we may have to pay in the future.

Not sure if this makes any sense or not, or if my reasoning is even correct but it is a concern I've been having for the last few weeks.

spider · #5 10-15-2007, 06:50 PM

Combined IRA limit is 4k this year, 5k next year.

As far as future taxation of Roth, obv just speculation but it's probably unlikely overall. If it does happen, I'd guess it is only of the form of something like a surtax on any balance over $1m or some big number like that. They could also just cap the amount that can be kept in an IRA and force you to take a distribution on the rest. Who knows, just speculation.

As far as spreading out the conversions over multiple years: so many things to consider here, just have to talk to your advisor about that. As far as speculation about how long this special conversion allowance will last... My guess is not too long, maybe it will be gone before 2010. Democrats might be looking for money and you'd think one of the easiest things to repeal would be a tax break for the rich that hasn't even taken effect yet.

TheMetetron · #6 10-15-2007, 06:59 PM

Something to consider.

I am currently in the 33ish% tax bracket I think, somewhere around there. Converting it 2010 definitely pushes me into the top one. Is this income taxed Self-Employment tax as well?

When I retire, I figure I'd be withdrawaing a yearly amount of what is in the 25%ish tax bracket, though that is obviously not guaranteed. Does the tax-free nature of a Roth make it worth converting?

So you'd recommend I take my $190k from my SEP-IRA and $19k from my non-deductible traditional IRA (assuming I max this every year until 2010) and convert it all in 2010 into a Roth IRA?

Then every year after that take the $50k (SEP + traditional) and throw that into a Roth IRA with everything I want to invest after $50k going into taxable?

Seems like I can build up a huge Roth nest egg this way though I'll be paying more taxes immediately (and especially after the 2010 conversion. But is it the best choice?

TheMetetron · #7 10-15-2007, 07:01 PM

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Combined IRA limit is 4k this year, 5k next year.

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I read this, but is this only for deductible tradtional IRAs or non-deductible as well?

spider · #8 10-15-2007, 07:10 PM

Metetron, I edited my post a little, things may be out of synch now....

[ QUOTE ]
I am currently in the 33ish% tax bracket I think, somewhere around there. Converting it 2010 definitely pushes me into the top one. Is this income taxed Self-Employment tax as well?

When I retire, I figure I'd be withdrawaing a yearly amount of what is in the 25%ish tax bracket, though that is obviously not guaranteed. Does the tax-free nature of a Roth make it worth converting?

[/ QUOTE ]

OK, if you think your rate is 33% now and 25% at retirement, you probably want to just leave things in the SEPs/IRAs. There is still a gain from conversion in the sense that a $2k Roth IRA protects more money from taxes than a $2k traditional IRA, but I'd think it's easily outweighed by the difference in 33% taxation vs 25% but of course you'd just have to make assumptions and plug it into a spreadsheet to be sure.

spider · #9 10-15-2007, 07:14 PM

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I read this, but is this only for deductible tradtional IRAs or non-deductible as well?

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Combined amount. E.g. if you put 1k in a traditional IRA this year, you are limited to an additional 3k in a Roth (assuming of course you qualify for each one).

TheMetetron · #10 10-15-2007, 08:00 PM

[ QUOTE ]
[ QUOTE ]
I read this, but is this only for deductible tradtional IRAs or non-deductible as well?

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Combined amount. E.g. if you put 1k in a traditional IRA this year, you are limited to an additional 3k in a Roth (assuming of course you qualify for each one).

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There is no qualification for a non-deductible IRA. Anyone can create one. That's why I'm not sure what the limits are.