“Can I open an IRA for my 4-year-old and 7-year-old sons?” — Marie

Only if they earn the income you use to do it. Are they TV stars? Chimney sweeps? Even so, not all financial institutions will be willing to do this. But some will set up IRAs for minors — so far as I know, it’s completely legal.

“I’ve read a lot about converting existing IRA’s to Roth IRA’s but my question is whether I can convert PART of my IRA (100K of 320K). I’m 62 years old and don’t want to deal with the taxes on the whole amount.” — William F.

Yes, you can convert as little or as much of it as you want.

“Of all that I have read about the pros and cons of switching to a Roth IRA, no one has dealt fully with the transfer of non-deductible contributions previously made to a traditional IRA. Can these funds be moved to a Roth tax-free? If they can, isn’t it a no-brainer that they should be moved (since that would exempt any further taxes on their growth)?” — Paul Kroger

Excellent question. Several of you raised it. Yes, the nondeductible contributions to your traditional IRA are not taxed when withdrawn. So in that sense, if you qualify to move money from a traditional to a Roth IRA, (as you do if your 1998 adjusted gross income will be below $100,000) this would be a no-brainer. You’d be transferring money whose growth would be taxed at withdrawal to a Roth IRA where it can grow forever free of tax. Great!

But the appeal of moving to a Roth IRA will depend on the proportion of nondeductible contributions in your IRA versus deductible contributions and growth.

  • If the bulk of your IRA’s value comes from nondeductible contributions — perhaps you just set it up two years ago, contributed $4,000 and now it’s worth $5,629 — then, yes, it’s a no-brainer. Switch to a Roth IRA if you qualify to do so and pay a little tax on the appreciation. (But note that in doing so — even if you’re over 59-1/2 — you begin the 5-year waiting period before which Roth IRA distributions are not tax-free.)
  • But what if you had an IRA worth $89,000 of which only $4,000 represents nondeductible contributions (because, say, your income was too high in a couple of years to make a deductible contribution, but you chose to contribute anyway)? Now you’ve got a $4,000 tail wagging an $85,000 dog. In this extreme example, the fact that a tiny proportion of the IRA transfer to a Roth IRA would not be taxed would barely affect your decision at all. It might make sense to switch to a Roth IRA — or it might not. See my earlier comment — but the nondeductible contributions you made would have very little to do with it.

Clearly, the more any transfer to a Roth IRA would be tax-free, because it represented nondeductible contributions, the more reason there would be to make that transfer.

To see what T. Rowe Price has to say about all this, click here. For Vanguard’s analysis, click here. And for its cool on-line IRA analyzer, click here.

[Note: If you don’t transfer your entire IRA over to a Roth IRA, you have to account for the transfer pro-rata. Say you made five nondeductible $2,000 contributions to your traditional IRA, totaling $10,000 . . . but this $10,000, through adroit management and the marvels of a bull market, is now $22,000. If you transfer the full $22,000 to a Roth IRA, you’d pay tax on $12,000. Easy. But if for some reason you transferred only $10,000 of the $22,000, you couldn’t just say it was the nondeductible part, you’d have to work out the proportion of the blend — in this case, 45% was nondeductible contribution, 55% appreciation — and pay tax accordingly.]

 

 

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