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Strategies & Market Trends : Roth IRA ideas

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To: Colin Cody who wrote (353)	8/21/1999 4:30:00 PM
From: Dan Duchardt	Read Replies (1) of 388

The hidden Roth IRA conversion penalty Something I thought I should pass along to anyone contemplating a Roth IRA conversion. After reading everything I could until it all sounded like old stuff, attending seminars, etc., I decided to take advantage of the 4 year averaging for Roth conversions executed prior to December 31, 1998. I made a substantial conversion, figuring the pain of paying taxes on the conversion amount now was worth not paying tax on future gains in the Roth IRA. What nobody I asked ever told me about was the hidden penalty this conversion carried in the form of disallowed credits. With 2 kids in their first 2 years of college, I was eligible for $3000 in education credits for 1998. Pretty nice new benefit from the tax code revision, right?? WRONG!!! Although I met the income requirements for the Roth conversion, the amount converted is treated by the IRS as ordinary income for purposes of calculating limitations on credits. I lost almost the full $3000. And we're not finished yet. The 4 years I will be paying taxes on the conversion will exactly span the time my kids are attending school. Pretty hefty price to pay on top of the tax I will pay on the conversion.

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