Joe, your question really has two answers.
a) If you invested "pre-tax" dollars into your original IRA, then you will be socked with paying taxes on the whole $7,000. (This would be if you received a tax deduction for your original contributions.) If you convert to a Roth in 1998, you would be able to allocate the $7,000 taxable income in 4-equal parts over the next 4 years.
b) If you invested "post-tax" dollars into your original IRA, then you will owe tax on the "gain" only, or $4,000 using your figures. This, too, would be taxable in 4-equal installments, (or $1,000 taxable per year.)
For your information, you can use "outside" money to pay the tax, that is, non-IRA money. Thus, you can roll all $7,000 into the Roth IRA, and use other funds to pay the tax. Some people may see that as an advantage, in that you essentially can place more $$$ into a tax-EXEMPT vehicle.
BTW, looks like you made some good choices...turning $3K into $7K!
As always, consult a tax expert if you are at all uncomfortable with this!
Regards...Bill S |
