Tri-State Neighbor: South Dakota Farm Newspaper

Dear Michael: We have been thinking about converting our regular IRA to a Roth IRA because we really don't need the money from the IRA. With crop rents going up and our cost of living - because we don't want to go anywhere anymore - going down, we already have a huge income tax problem. We pay far more now in taxes each year than we ever did while we were farming.

With our Required Minimum Distribution going up each and every year, we just give more and more of it to the government. Plus we have one son farming, and we wanted to use the IRA to give to our three daughters not farming. With IRS forcing us to take the money out, the money probably won't be there by the time we die. We just worry about what the taxes will be if we roll the money over. What can we do? - RMD'd to Death.

Dear RMD'd: You left off the last little bit of unpleasant news - that being your daughters are going to have to pay income taxes on the funds they receive from the regular IRA upon your death. This always goes over like a lead balloon when one child receives an inheritance tax-free and the others have to pay income taxes on theirs.

Plus, with the cost of land doubling in the past three years, I'd wager the IRA going to your daughters hasn't kept pace with the increase in value on the land, has it? So your daughters' inheritance is dropping in value compared to the land going to your son; they're going to have to pay income taxes on it when they receive it and you have to pay income taxes on your Required Minimum Distributions from it until you die. Sound's like the perfect estate planning gift, doesn't it? It hits the trifecta for things we don't like.

Of course, for a great many people, the thought of paying taxes on an entire regular IRA to a Roth in one year's time is enough to give them pause. However, there is no rule you have to roll all of the funds in one year's time.

Income tax tables are progressively worse the higher you go and it takes quite a bit of planning to decide the amount you'd like to rollover per year.

One has to understand the tax tables in order to determine how to handle an IRA rollover. The tax tables are zero dollars to $15,650 is 10 percent tax rate, $15,650 to $63,700 is 15 percent tax rate, $63,700 to $128,500 is 25 percent, $128,500 to $195,850 is 28 percent, $198,500 to $349,400 is 33 percent, and over $349,500 is at 35 percent.

Important to remember is these are all “net” taxable income amounts. If you have deductions for land taxes, business expenses, etc. and/or use standard deductions, you can actually earn quite a bit more income than the income amounts listed above without going into the next tax bracket.

Everyone needs to sit down and figure out what their average annual income is right now and what bracket they are typically in. This is much easier after retirement as income tends to stabilize after retirement. Remember to subtract the required minimum distribution income now because, if you do a Roth rollover, RMDs are no longer required.

Now, if you are in the 15 percent tax bracket and the entire rollover would move a portion of the funds into a 35 percent tax bracket, then you would be better off rolling only a portion of your entire IRA to a Roth each year. You need to segment out the perfect amount to fit into the lowest increase in tax bracket per year. Perhaps it will take you two, three, four, five or longer years to move the entire IRA to a Roth based on your particular tax bracket.

You need to balance the cost of moving these funds over your projected period of time in question versus returns per year once the money is in a Roth for a true picture. In other words, if the cost is 10 percent more in tax to move the money but once the money is in a Roth, a 4 percent rate of return is paid (fairly easy), you know it will take two and a half years to recover back to your original amount. This won't occur if you take four, five or more years to move from a regular IRA to a Roth.

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