On money

By HELEN HUNTLEY

© St. Petersburg Times, published March 4, 2001

Can traditional/Roth IRA conversion result in write-off?

Q. I opened my first traditional IRA in 1999 with a non-deductible $2,000 contribution. Because of the stock market decline, that IRA is worth only $830. Last year, I opened a Roth IRA and contributed $2,000 to that. Now I would like to convert my traditional IRA to my Roth IRA. Will I be able to write off my loss?

A. Maybe.

Transactions inside an IRA are not taxable, which means neither gains nor losses is recognized. It is only when you withdraw the money that you create a taxable event, which ordinarily means paying taxes on your withdrawals. But under the right combination of circumstances, a withdrawal will allow you to recognize a loss. Here is how that works:

"You can take a loss only when there are non-deductible contributions and only if the entire IRA account is distributed to the IRA owner," said Ed Slott, an accountant and IRA expert in Rockville Centre, N.Y. If you had your traditional IRA divided into multiple accounts, you would have to empty all of them.

What this means is that you could realize a $1,170 loss if you withdrew your entire $830 balance and did not convert it to a Roth or roll it over to another IRA. However, the loss is deductible only as one of your miscellaneous itemized deductions, which added together must be greater than 2 percent of your adjusted gross income before you can deduct anything. If you do not itemize, you do not get the deduction.

Look at your tax situation to see how much benefit you would get from a loss. If you decide to do the conversion instead, you lose out on the loss, but you will not owe any tax on the conversion, Slott said.

Q. Is there any annuity that would be free from confiscation by the state in the event I became incapacitated and went into a nursing home? I am talking about an annuity that would be in the same class as a home or vehicle and not have to be spent down to qualify for Medicaid. I am 80.

A. The state will not confiscate your money, but depending on how much you own and whether you are married, it may require you to spend it before qualifying for taxpayer assistance through Medicaid.

Annuities are not in the same protected class of assets as a home or car. But in qualifying for Medicaid, some types of annuities as well as individual retirement accounts can be counted as a source of income rather than as an asset.

The key is that the annuity must be irrevocable, non-assignable and paying out income for the life of the insured person or for a period of years not longer than that life expectancy. The trade-off is that income from the annuity will be counted and may reduce benefits you or your spouse otherwise would receive.

Annuities are used in Medicaid planning mainly to provide additional income for a spouse who is not in a nursing home. If the income is paid to you, it will have to go to the nursing home to help pay for your care.

Before buying an annuity, it would be a good idea to get some advice on how the Medicaid eligibility rules apply to your situation.

Q. You mentioned that the income tax deadline this year is April 16. Does that apply to estimated tax payments, too?

A. Yes, it does. When an IRS deadline falls on a Saturday, Sunday or federal holiday, it is changed to the next business day.

Q. I am taking required distributions from my IRA. Can I pay the tax and roll over what's left into a Roth IRA? My income consists of Social Security, pension and interest.

A. No. Required distributions cannot be rolled over.

Correction

Taking distributions from an IRA or retirement plan will not require a low-income taxpayer to file a tax return unless the amount puts the person over the minimum income threshold. Last week's column was incorrect on this point.

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- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.

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