Client Alert Winter 1998 - Roth IRA Conversion

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Client Alert - Winter 1998

Roth IRA Conversion
By: Mike Engleman, CPA

Taxpayers who converted an individual retirement account (IRA) into a Roth IRA are subject to income tax based on the value of the account at the time of conversion. Individuals who converted early in the year and then saw the portfolio value decline as the market dropped were able to convert the Roth IRA back to a traditional IRA, then reconvert back to a Roth IRA at a lower value. This tax planning technique resulted in a lower tax liability based on the last conversion.

Prior to November 1, 1998, there was no limit on the number of times a taxpayer could convert and reconvert between a traditional IRA and a Roth IRA. Effective November 1, 1998, the Internal Revenue Service issued regulations restricting taxpayers to one reconversion to a Roth IRA in 1998 and one in 1999. Anyone who reconverted multiple times before November 1 will be unaffected. After November 1, investors can undo a conversion to a Roth IRA and then convert back to a Roth IRA only once before the end of 1998. The 1998 conversion can be reversed prior to the April 15, 1999 tax return due date or the extended due date. A reversed 1998 conversion can also be reconverted one more time in 1999. The following example illustrates the new regulation:

Taxpayer converts a traditional IRA to a Roth IRA on November 9th, and on November 27th reverses the transaction back to a traditional IRA. The taxpayer is then eligible to convert the account back to a Roth IRA only one more time before December 31, 1998. In 1999 the taxpayer will have another opportunity to reconvert.

NOTE: If you would like to discuss issues regarding the Roth IRA in more detail, feel free to call Mike Engleman, who has received the AICPA's Certificate of Education Achievement in Tax Planning and Advising for Closely Held Businesses.

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