Question

Pablo and his wife Bernita are both age 56. Their combined AGI is 81000. Neither is a participant in an employee sponsored retirement plan. They have been contributing to a traditional IRA for many years and have built up an IRA balance of 100.000. They are considering rolling the traditional IRA into a Roth IRA.

a. Is the couple eligible to make the conversion?
b. Assume that the couple does not make the conversion but instead establishes a separate Roth IRA in the current year and properly contributes 2900 per year for four years, at which point the balance in the Roth is 21000 ( contributions plus investment earnings) At the end of 4 years they withdraw 21000 to pay for an addition to their house. What is the amount of withdrawal that is taxable, if any?
c. Assume same facts as in requirement b , except that they instead withdrew only 6000 . What is the amount of withdrawal that is taxable?
d. What is the taxable amount if the 21000 withdrawal is used to pay qualified education expenses for their daughter who is attending college?

Answer 1

a. Yes, the couple is eligible to make the conversion. b. No taxable amount upon withdrawal. c. No taxable amount upon withdrawal. d. $9,400 of the withdrawal would be taxable.

Step-by-step explanation:

a. In order to convert a traditional IRA to a Roth IRA, there are certain income limits that need to be considered. For 2021, married couples filing jointly with a modified adjusted gross income (MAGI) of over $208,000 are not eligible to make a direct Roth IRA conversion. Since the couple's combined AGI is $81,000, they are eligible to make the conversion.

b. Since the Roth IRA contributions are made after-tax, the contributions themselves are not taxable upon withdrawal. However, any earnings on those contributions would be subject to tax if withdrawn before age 59 1/2 and without meeting certain exceptions. In this case, the couple contributed a total of $11,600 ($2,900 per year for 4 years), so there is no taxable amount upon withdrawal since the entire $21,000 withdrawal consists of contributions.

c. Similar to the previous scenario, there is no taxable amount upon withdrawal since the entire $6,000 withdrawal consists of contributions.

d. If the $21,000 withdrawal is used to pay for qualified education expenses for their daughter, the earnings portion of the withdrawal would be subject to tax. Since the total contributions were $11,600, the remaining $9,400 would be considered earnings and taxable.