by Michael Bleck
© 1997, Michael Bleck
With January 1, 1998 bearing down upon us many taxpayers are asking the question, "Should I convert my ordinary IRA to a Roth IRA?" In order for a taxpayer to evaluate this question they will need to look at Roth IRA conversion software. There appears to be Roth IRA online calculators popping up all over. Many of the large brokerage firms have online Roth IRA calculators. Are these online calculators accurate? It should be noted that no software program is perfect, however, it should be technically accurate. Let's look at some distinct features that Roth IRA software (including online calculators) should have.
1. Does the software include required minimum distributions?
As stated above, a software program must be technically accurate. Therefore, if the software does not take into account the required minimum distributions from an ordinary IRA, it is not accurate. The suspension of the required minimum distributions is one of the major advantages of a Roth IRA over an ordinary IRA. If the program does not include required minimum distributions in the Roth IRA conversion analysis, the program is virtually worthless.
2. Does the software have the ability to use single life and joint life calculations?
If the software program does not allow for joint life calculations, the program is not completely accurate. By using joint life calculations a taxpayer will reduce his/her required minimum distributions.
3. Does the software have the ability to handle both the recalculation of life expectancies and term certain methods?
Generally, recalculating life expectancies is a reasonable assumption for ordinary IRAs because a married taxpayer has to elect out of recalculation in order to be on a term certain method. However, on the Roth IRA side, a nonspousal beneficiary will be on the term certain method after the death of the owner. This method is as easy as it gets, and therefore any program that does not include this method is seriously deficient. In that regard, all programs should have some way of indicating the death of the IRA owner, especially since the death of the Roth IRA owner triggers required minimum distributions.
4. Does the software have the ability to handle spousal rollovers for Roth IRAs?
Roth IRA programs should handle spousal rollovers, especially since the IRS’ Model Agreement (see Article V of the Form 5305-R) includes a provision for an automatic spousal rollover when a married person dies. This means that the spouse will be the owner of the Roth IRA at the death of the Roth IRA owner. If the software does not handle this, it means that the surviving spouse will always be assumed to be taking distributions immediately following the death of the other spouse. This is not a realistic assumption.
5. Does the software have the ability to handle spousal rollovers for ordinary IRAs?
If the software does not contain a feature that includes doing spousal rollovers for ordinary IRAs, it cannot compare a spousal rollover for a Roth IRA and an ordinary IRA because the comparison will not be apples to apples.
6. Does the software allow the taxpayer to input his/her annual needs without regard to the required minimum distributions?
This is a crucial element in a Roth IRA program. The software should be able to model distributions in excess of the required minimum distributions. If the software is unable to do this, the wrong conclusion could be reached. The Roth IRA will look better than it actually is if distributions are in excess of the required minimum distributions and these higher distributions are not taken into account.
7. Does the software have unrealistic assumptions?
An advantage of the Roth IRA is that no distributions are required before the death of the account owner. Therefore, if a program assumes that the ordinary IRA and the Roth IRA make all payouts over the same period of time, it is unrealistic. All assumptions should be reviewed to see whether they are realistic.
8. Does the software take into account estate taxes?
This is absolutely necessary for analyzing a Roth IRA conversion only if the taxpayer has or is likely to have a taxable estate. The estate considerations have a tremendous effect on analyzing whether or not to convert to a Roth IRA.
9. Does the software have an option to impose the proposed penalties contained in the Tax Technical Corrections Act of 1997?
This is not a consideration for taxpayers who can pay the taxes on the conversion from sources outside the Roth IRA, however, it is vital for taxpayers who will pay the taxes on the conversion from inside the Roth IRA. Without those penalties, the analysis could indicate to convert to the Roth IRA when in fact a conversion may not be advantageous. If an IRA owner is younger than 59½ at the time a distribution is made or converts to a Roth IRA in 1998, a 10% penalty will be imposed. Therefore, if a taxpayer is both younger than 59½ and makes a 1998 conversion, he/she could be subject to a 20% penalty on the funds withdrawn from the Roth IRA. As you can imagine, this could have a tremendous effect on the outcome of the analysis.
Author Information:
Michael Bleck is a tax associate at Schumaker, Romenesko & Associates, Green Bay,
Wisconsin and has recently finished his master's thesis on the Roth IRA. Since the
Taxpayer Relief Act of 1997, his practice has focused on conversions to the Roth IRA. Mr.
Bleck has analyzed over 100 Roth IRA conversions for clients. He is a graduate of
University of Wisconsin-Whitewater with a bachelor's degree in accounting.