Tax Tip of the Week
900 N. Kings Highway, Cherry Hill, New Jersey 08034
856.667.4100 ·
215.563.0276 ·
Fax: 856.667.3652
The year 2000 was not a good year for Roth rollovers
For the week of
January 8, 2001
Most investors saw their stock portfolios drop in value as
2000 came to a close. This could have some very adverse tax effects on those who rolled their traditional IRA funds
into a Roth IRA during 2000.
Under the tax law, rollovers from a traditional IRA to a Roth are subject to income tax. The amount of tax is based
on the value of the IRA on the date of the rollover. Paying income tax on the rollover can be bad enough, but paying
tax on value that is no longer there is like pouring salt in the wound. Let's look at this example:
In March 2000, Bob had a traditional IRA invested in a mutual fund with a market value of $100,000. He qualified
for and asked that the funds be rolled over into a Roth IRA. However, by December 2000, his fund statement showed
that the value of his Roth IRA had dropped to $70,000. Not only has he lost value in his IRA, but also Bob will
be taxed on his 2000 tax return on the full $100,000, the value of the IRA at the time of the rollover.
Fortunately, Bob can reverse the rollover and eliminate the tax bill he would otherwise face. He has until the
due date of his 2000 tax return (plus extensions) to "recharacterize" the Roth and switch it back to
a traditional IRA. If properly done, Bob will have no income tax due on the Roth rollover.
The rules governing IRAs are among the most
complex in the tax code. For assistance in this area, contact us. We are here to see that you pay no more tax than
the law requires.
Click here to view previous tax tips.
"Tax Tips" are published weekly to
provide useful tax information. Return to this site every week for helpful tax-cutting suggestions, tax reminders,
and current tax information.
The information contained in this site is of a general nature and should not be acted upon in your specific situation
without further details and/or professional assistance.
If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list
to receive other tax-cutting information from time to time, please contact our office. We're here to help.
