I'm a retiree without much income, but I do have an IRA with a current value of about $100,000. I've heard that converting an IRA to a Roth IRA makes sense only if you are younger and many years away from retirement. Do you agree?
-- A. T., Plymouth
The short answer to this question is the same as the answer to many tax questions: kind of/sort of. Generally speaking, the younger you are when converting a traditional IRA to a Roth IRA, the longer you have to enjoy the benefits of tax free accumulation of interest, dividends and capital gains. And it provides more time to recover (financially and psychologically) from the hard truth that taxes had to be paid on the entire conversion amount.
But your situation offers some interesting exceptions which might make it feasible to convert now. First, tax rates for lower and middle income people have dropped significantly in the past several years (four tax cuts since 2001), and your tax hit (especially since your taxable retirement income is lower) might not be nearly as high as it would have been had the conversion occurred when the Roths appeared in the late '90s.
On the other hand, your tax bracket could be low enough to allow you to take a little bit out of your traditional IRA each year and face a tax bite that's very small. Turning to the other inevitable, your heirs inherit the Roth IRA tax-free. But they will have to include in income any distributions from a traditional IRA that was part of your estate. Of course, at that point, you might not care.
Win-win-win on stocks
When my father died in the late 1990s, he left me more than 200 shares of Bendix (now Honeywell) stock. I sold the stock last year and received a Form 1099 reporting the amount of money received. Does this get treated as an inheritance? How do I determine the original value of the stock?
-- R.C., via e-mail
Your question focuses on a winning stock that you inherited. This is one of those rare "win-win-win" situations. Win No. 1: When the stock was inherited, its move into your possession was a tax-free event for you. Perhaps your father's estate paid an estate tax but that's unlikely since only about 2 percent of estates pay this transfer (not "death") levy.
The second win is tied to the value of the investments you inherited. They are usually valued at the fair market value (FMV) on the date of death. Contact a stock broker and ask for the value of a share of Bendix stock on the date of your Dad's death.
You complete the tax "trifecta" of good news by facing a maximum federal rate of 15 percent. Or, if you are in the 10 percent or 15 percent tax bracket in 2012, a capital gains tax rate of zero on the Long Term Capital Gain (i.e., the difference between the 2012 stock proceeds and the FMV mentioned earlier) plus the applicable state and local taxes will apply. Congratulations on your trifecta. Maybe today would be a good day to buy a Powerball ticket!
Tax Talk is written by Ken Milani, professor of accountancy at the University of Notre Dame, and Claude Renshaw, emeritus professor of business administration at Saint Mary's College. It will appear in the Tribune's Business section on Sundays until April 14. Send your questions via e-mail to firstname.lastname@example.org or email@example.com, or snail mail to The Tribune at 225 W. Colfax Ave., South Bend, 46626. Questions cannot be answered personally, but Tax Talk will try to reply to as many as possible in the column.