Ask Kim
Tax Rules for IRAs
I heard that we can only convert a traditional IRA to a Roth IRA if our combined income is $100,000 or less. Is this true?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
March 7, 2005
I heard that we can only convert a traditional IRA to a Roth IRA if our (my wife and I, we file jointly) combined income is $100,000 or less. Is this true? If it is true, and we still want to make a conversion, does it make sense to file separately, since our individual incomes are less than $100,000?
Yes, it's true that you can convert a traditional IRA to a Roth IRA only if your income is less than $100,000. And good try asking about filing separately, but that won't work, either.
The $100,000 rule applies to singles as well as married couples, and you can't convert an IRA to a Roth at all if you're married filing separately. For more information about the rules for converting to a Roth, see IRS Publication 590 Individual Retirement Arrangements, especially page 26.
If you do fall below the cut-off, you'll need to decide whether it's worthwhile to pay the tax bill on your earnings now so you can get tax-free earnings from the Roth for the future. Check out our Should I Covert My IRA to a Roth IRA? calculator to run the numbers.
You can Deduct IRA Losses
In 1999, I rolled $30,000 from a traditional IRA to a Roth. The account is now worth only $11,000. I heard that I can close out the Roth, take the $11,000 penalty-free and claim a $19,000 loss. Is that correct? I have another Roth that has been profitable. Does that affect my ability to claim the loss?
The profitable Roth does come into play. You must liquidate all your Roth accounts and if you wind up with less than your basis, then you may have a deductible loss.
Your loss would be deductible as a miscellaneous expense – not as a capital loss. Miscellaneous write-offs are deductible only to the extent that they exceed 2% of your adjusted gross income (for a list of miscellaneous deductions, see IRS Publication 529).Your basis is the total of after-tax money you've invested, including the $30,000 you rolled over, because you had to pay tax at the time of the conversion.
Let's say you've contributed $10,000 to your second Roth and it's now worth $15,000. If you were to liquidate both accounts, you'd pull out $26,000. Comparing that to your basis ($30,000 plus $10,000) would leave you with a $14,000 loss.
If closing both Roth accounts would give you a tax break today, weigh your savings against the loss of tax-free earnings in the years ahead. And if you are already saving the annual maximum in your IRAs, remember that you can never truly rebuild your balance.
For more about the tax rules surrounding IRAs, see Retirement Planner's Tax Guide.