Pablo and his wife Bernita are both age 60. Their combined AGI is $100,000. Neither is...

Pablo and his wife Bernita are both age 60. Their combined AGI is $100,000. Neither is a participant in an employer-sponsored retirement plan. They have been contributing to a traditional IRA for many years and have built up an IRA balance of $120,000. They are considering rolling the traditional IRA into a Roth IRA.

A. Is the couple eligible to make the conversion?

B. Assume that the couple does not make the conversion but, instead; establishes a separate Roth IRA in the current year and properly contributes $2,500 per year for four years, at which point the balance in the Roth is $21,000 (contributions plus investment earnings). At the end of four years, they withdraw $17,000 to pay for an addition to their house. What is the amount of withdrawal that is taxable, if any?

C. Assume same facts as in requirement b, except that they instead withdrew only $6,000. What is the amount of withdrawal that is taxable?

D. What is the taxable amount of the $17,000 withdrawal is used to pay qualified education expenses for their daughter who is attending college?

Solutions

Expert Solution

Yes. Taxpayers can roll a traditional IRA to a Roth IRA at any time. The amount rolled will be included in their gross income in the year converted. In 2010, there is no AGI limitation that might prohibit conversion.

b. If a Roth has not been in existence for at least five years, a withdrawal is taxable if it exceeds contributions made to the Roth. Withdrawals are deemed to first come from contributions and then from earnings. In this case, the Roth has been in existence for only four years and the $12,000 withdrawal exceeds accumulated contributions of $8,000. Thus, the withdrawal is taxable to the extent of the $4,000 excess.

c. Yes. None of the withdrawal is taxable because it does not exceed accumulated contributions.

d. $4,000 of the withdrawal will continue to be taxable. A withdrawal of earnings within the first five years is taxable except in very limited circumstances. Education expenses are not an exception.

ekkarill92 answered 8 months ago

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