Taking Stock: Roth IRA conversions a practically limitless gold mine for high-income folks

Dear Mr. Berko: A friend was trying to explain to my wife and me how doctors or other high-earning taxpayers can save $12,000 a year in an Individual Retirement Account (IRA) and never pay taxes on the income, even when it is withdrawn. This friend is a brilliant physician but lacks common sense on the matter of money and investing. I told him that he was being hoodwinked again, but he was so adamant that his information was accurate that he challenged me to a substantial wager, which I would not accept. I called my accountant for verification. He confirmed what I believed. And when communicating this to my colleague, he offered to double the bet and give me odds. Now I wonder if my CPA is wrong and my colleague is right. Can a high-wage couple invest $12,000 a year into a Roth IRA that appreciates tax-free with no exit or tax costs? If so, who made these rules, and why haven't I heard of them before? I (and several others) look forward to your answer. MD: Oklahoma City, Okla. Dear MD: Yep, your colleague is as right as sunshine and blue skies. And you have a small group of dedicated folks to thank for this loophole. They're easy to identify. Their fingernails are manicured, their hair is slicked back like cake frosting, their teeth are perfectly capped and their wrinkles, bags and sags are erased by Hollywood surgeons. They wear monogrammed boxer shorts, custom suits, handcrafted shoes and fine silk ties. They fantasize about being called "Your Majesty," their favorite word is "I" warmed by a coached smile and their strongest body muscle is the tongue. Cash brings them to orgasm, so deposit slips are printed on the backs of their calling cards. When they enter a room, the atoms quickly regroup, and you immediately know in your heart of hearts that these people are not to be trusted. These are the folks who made these rules, and we call them congressmen. Last year, these good fellows changed the tax code, permitting high-income earners (no matter your income) to convert an existing traditional IRA into a Roth. As you know, prior to last year, Roth conversions were permitted only for singles or couples whose adjusted gross incomes totaled less than $100,000. Today there is no dollar limit on the amount one can convert from a traditional IRA to a Roth. But you still have to pay taxes on your untaxed contributions and investment gains that have been deferred. Single filers can make the Roth contributions if their incomes are less than $107,000, and a couple can make the contributions if their combined incomes are less than $169,000. It appears that Congress unintentionally (or intentionally) "fluked" a loophole in the code. Regardless of your income (you can make $10 million a year), you can open a traditional, non-deductible IRA, which, since the income limits have been eliminated, can be converted into a Roth. So high-income singles or couples at age, say, 50, can contribute to a traditional IRA ($6,000 each) and then flip it to a Roth. Annual contributions of $6,000 to $12,000 per couple may not be significant to some folks. But if that money earns 6 percent, the resulting yearly contributions plus annual compounding could be significant when you hang up your tools in 15 to 20 years. And if Congress raises the contribution limits allowing the loophole to remain -- fairly soon that turns into real money. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2011 Creators Syndicate Inc. Published: Mon, Aug 15, 2011