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Roth conversion may be possible despite AGI limit

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The Þnancial wisdom of whether to convert, or roll over, a traditional tax-deductible individual retirement account into the new Roth IRA depends on such factors as your Þnancial circumstances, age and method for paying conversion taxes.

You'll want to run the numbers with your Þnancial adviser to Þnd out. But for some taxpayers the issue is a moot point: their income is too high to qualify for a conversion.

If your adjusted gross income (AGI) is $100,000 or more (single or married joint Þlers), you cannot convert an existing IRA to a Roth. (You also can't contribute to an existing Roth IRA if your AGI, married Þling jointly, reaches $160,000.) But don't give up yet.

If your income is only marginally more than that $100,000 threshold, you might still be able to make the conversion if you make some Þnancial moves before the end of the year.

1998 is certainly the year to convert if you can. That's because even though you'll have to pay regular income taxes on the money you move out of a traditional IRA into a Roth, you can spread that money out over four years.

As a further incentive for those wishing to convert but whose income may be too high, Congress recently passed a provision as part of its IRS restructuring and technical corrections act that should lower the risk of conversion.

Let's say you convert, or roll over, IRA money into a Roth IRA, but then you unexpectedly end up earning $100,000 or more during the conversion year. This means the Roth IRA is no longer valid.

Under the original Roth legislation, you would have been stuck paying regular income tax on the money that otherwise would have continued to grow tax-deferred in your regular IRA.

You also could have ended up paying the early distribution penalty if you were younger than 59 1/2.

However, Congress now says you can roll the money back into the regular IRA(s) you took it out of, free of any penalty tax or income tax, as long as you roll it back before the date your tax return is due for the conversion year.

A couple of other points to keep in mind regarding the $100,000 income limit: The conversion or rollover amount doesn't count toward your AGI. If you make $95,000 in AGI, and you roll over $200,000 from a regular IRA to a Roth, none of that $200,000 counts toward the AGI limit.

Alas, life is not quite so simple for many seniors. Taxpayers who've already begun taking minimum distributions from their regular IRAs you must start no later than April 1 of the year following the year you turn 70 1/2 can't exclude those minimum distributions from their AGI.

That will push some older taxpayers over the $100,000 AGI limit for conversion. As part of its technical corrections act, Congress said these minimum distributions won't count toward the AGI limit, but the provision doesn't go into effect until 2005.

So where do these new provisions leave you if you're near that $100,000 AGI limit? If converting to a Roth makes sense, look for ways to reduce your AGI. Most of the techniques are the basic ones tax advisers recommend.

For example, you might be able to defer income such as bonuses or billing, accelerate expenses, increase charitable contributions, increase retirement plan contributions, delay exercising stock options or recognize investment losses.

Remember, though one should be cautious about letting taxes drive other aspects of your planning.

(The preceding article was produced by the Institute of CertiÞed Financial Planners and provided by William O. Woody, CLU, ChFC, CFP, of Stovall Woody Associates.)

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