As a tax preparation professional, friends and clients will begin to ask your advice on different tax strategies. One of the more significant areas, that ultimately affects everyone and is completely understood by few is in the area of retirement. Particularly during tax season you will receive questions related to retirement investments and how to work through the variety of options and programs available to taxpayers. Please pay attention to this, there is no single best option for everyone,

For this weeks Tax Return Problem; complete the following retirement problem. There are no forms required to complete the problem. Only the advice given to Jennifer. Make sure you show your calculations so Jennifer can understand your explanation. Jennifer is age 50 and is seeking your advice. She has a traditional IRA with a balance of $100,000 and is considering whether to convert it (roll it over) to a Roth IRA. She has sufficient money in CDs to pay any required tax resulting from the rollover. Her current AGI is $70,000.

She expects her income will be slightly higher upon retirement at age 65. What advice would you give Jennifer?

a. Would your response be different if she does not have the CD to pay the required tax and has to take an early withdrawal [with penalty] of a portion of her IRA to pay the rollover taxes?

Assumptions

• Tax rates remain constant at 30%.
• All investments (CD and IRA) will grow by 50% in total by the time she retires.
• The CD will exactly pay the conversion taxes now, and will not be taxed again until retirement.