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On money

Personal Finance editor


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© St. Petersburg Times, published December 3, 2000

Know when to convert traditional IRA to Roth IRA

Q. I made and properly documented after-tax contributions that are included in my individual retirement account. Can these funds be rolled over into a Roth IRA without any income tax consequences?

A. You can't do what you have in mind, but converting your traditional IRA to a Roth IRA might be a good idea for you and many other readers.

If the value of your IRA dwindled along with the stock market this year, your tax bill will be less than it would have for an earlier conversion.

The main benefit of a Roth IRA is that your money and its future earnings eventually can be withdrawn tax-free, assuming you follow the rules. Because there are no required withdrawals, you can opt to leave the account intact for your heirs and provide them with lifetime tax-free income after your death.

The Roth's main drawback is that you cannot put money in without paying taxes on it, whether you are talking about a conversion from a traditional IRA or a new contribution. Because your traditional IRA includes after-tax contributions and pretax investment earnings, any conversion will be partly tax-free and partly taxable. That's true whether you convert your entire account or just part of it.

With the end of the year approaching, review your tax situation to determine whether you are better off converting in 2000 or 2001 or converting part each year. Postponing the conversion usually will be beneficial unless you will qualify to take the money out at a lower tax rate this year.

To be eligible for a conversion, your income (whether joint or single) must be $100,000 or less, not including the amount of the conversion.

Conversions make sense if you can pay the taxes from some source other than your IRA and if you can leave the money in the account at least five years. They are particularly attractive for young people who get the benefit of decades of tax-free compounding.

* * *

Q. I have about 13 E bonds purchased in 1971. I understand these will no longer earn interest. Would you suggest that during 2001 I swap them for HH bonds?

A. You are correct that your bonds will stop earning interest 30 years after their issue date. I don't recommend swapping for HH bonds because they pay only 4 percent interest. The benefit of additional tax deferral isn't worth the sacrifice in yield.

Take a close look at your income tax situation to decide whether you would be better off redeeming half the bonds this year or waiting until next year to redeem the entire lot.

* * *

Q. We sold some stock this year on which we will owe capital gains tax. Do I have to file estimated taxes? We did not have to file an income tax return for 1999.

A. No. If you did not have to pay income taxes for 1999, you do not have to file estimated taxes for 2000 even though you know you will have a tax liability this year. Put the money in an interest-bearing account, such as a money market mutual fund, until April. If you had paid taxes last year, you would need to be sure that your withholding and estimated taxes would be equivalent to the tax you paid last year.

Reader feedback

Last month a reader asked about charging adult children room and board. Several readers wrote in about their own experiences. Here's an idea one of them offered:

"When our oldest child finished school and found a job, we figured his total living expenses for a year, divided the amount by 12 and gave him enough money to survive for three months. We also paid the deposits on his apartment and utilities and his moving expenses. We then turned his room into a den. When our other three children left home, we turned their rooms into a sewing room, home office and media room. None of them ever moved back home nor have they asked for money to support themselves. I guess they just needed that little extra push out of the nest."

Online money map

T. Rowe Price has made its popular retirement income calculator available online ( Use it to determine whether your retirement income goal is realistic or whether you are likely to run out of money during your retirement years.

-- 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 by e-mail.

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