The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Minnesota is representative of a common inquiry regarding the tax impact of a Roth IRA conversion. The advisor asked:
“My client would like to convert his traditional IRA to a Roth IRA. Over the years he has made both deductible and nondeductible IRA contributions. Are there any strategies for reducing the tax impact of a Roth IRA conversion?
Highlights of Discussion
- Yes, even though a traditional-to-Roth IRA conversion is typically a taxable event because of the rules that require an IRA owner to treat withdrawals as consisting of a pro rata share of deductible (pre-tax) and nondeductible (after-tax) amounts, there may be ways to reduce your client’s tax obligation. Encourage your client to speak with his tax advisor regarding the tax obligations of a conversion.
- One strategy your client could consider with his tax advisor would be to contribute more after-tax dollars to his traditional IRA, thereby improving the ratio of after-tax to pre-tax dollars in the IRA, and reducing the taxability of a conversion. If your client has earned income and is under age 70½, he likely could make nondeductible contributions to his traditional IRA — regardless of his income level.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2015 Columbia Management Investment Advisers, LLC. Used with permission.
