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Question #1: Due to a Roth IRA conversion, I may have a very large amount to pay in taxes next April. Can I avoid the underpayment penalties that are related to estimated taxes?

Unfortunately, there is no way to become exempt from the underpayment penalty. It doesn’t matter that the amount is based on a conversion. There are some exceptions to the underpayment rule, so it is best to review the rules and regulations revolving around underpayment.

Question #2: After converting from a regular IRA to a Roth, will that income be applied to my adjusted gross income for that year?

Any income that you report for a traditional IRA conversion to a Roth account will most definitely have an affect on your adjusted gross income. The exception to this applies to direct contributions to the Roth. If you meet the limitation rules and are allowed to convert prior to the conversion income being taken into consideration, the income from the Roth will not make you ineligible due to an increased AGI. However, all tax provisions that currently use AGI as a guideline, such as medical expenses, miscellaneous deductions and passive loss limitations, will be greatly affected.

Make sure to take your AGI into consideration before making the decision to convert. A significant change can cause a lot of problems after the conversion has been performed. Always be sure to abide by rules to avoid penalties.

Question #3: My intention is to retire at age 50. When that occurs, I will need additional income. Is there a way I can take money from my account without having to pay penalties or taxes?

Based on the rules, the answer is yes. You are allowed to withdraw any original contributions without having to pay taxes or penalty fees. Also, if you have had the account for at least five years, you can take out any original amounts that were converted without taxes or IRA penalties. The only time you may encounter a problem is when you begin to withdraw any earnings that were generated by the contributions and conversions. You will then have to pay taxes and penalties on the amount being withdrawn. Be sure to know and understand withdrawal rules to avoid possible penalties based on improper withdrawals.

It is possible to avoid penalties if you begin withdrawing from your account before you reach 59 1/2. However, you may not be so lucky as to avoid the taxes. If you have a scheduled distribution and begin removing funds before 59 1/2, you will be able to obtain the funds without penalties.

Question #4: I have heard that the AGI limitation is $100,000, but I have also heard that the limit is higher. What is the limitation for a Roth?

The limits will vary depending on whether it is a conversion. If there is a conversion from a traditional IRA account to a Roth, the AGI limitation is $100,000, unless you are married and file separately. Separated couples cannot make a conversion, no matter what their it is. The conversion cannot be made until the separated couple has lived apart for more than one year.

The rules differ when referring to contributions that are made to a Roth IRA plan. With contributions, the AGI limitations are based on your tax filing status. If you file single and have an AGI of less than $116,000 (on your 2007 tax forms), then you are eligible for Roth IRA contributions. Married couples can have up to $166,000 AGI.

A Roth IRA is a great tool to prepare for retirement. Make sure you familiarize yourself with all rules, regulations and penalties that are involved. It is better to take the time to review this information now than to get hit with unforeseen taxes and penalties in the future.

Question #5: Upon converting a traditional IRA to a Roth, are taxes due all at once?

Whenever you make a conversion, all due taxes must be paid at once. When they were first out, there were other rules that stated you were allowed to spread out the conversion income. That rule has been revised and is no longer an option. All taxes must be paid upon the time of the conversion. Congress has most recently passed a law that allows for the taxes related to a conversion in 2009 and 2010 to be paid in 2011 and 2012. See your financial advisor or call Estate Street Partners to implement this.

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Roth IRA-Best IRA

Read more Roth IRA FAQs: Social Security Money, AGI Limits
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