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Using a NOL to Offset a Roth Conversion | Tax Tip of the Week | No. 73 December 29, 2010

Posted by bradstreetblogger in : Tax Tip, Taxes, Uncategorized , trackback

The economic conditions of 2010 have been particularly brutal for many small business owners.  When business expenses exceed business income it can create what is called a Net Operating Loss (NOL).  In very limited circumstances an individual taxpayer can also realize a NOL, but that discussion goes beyond the scope of this Tax Tip.

While losing money is never desired, it can turn into a very attractive tax planning opportunity.  If, for example, a business owner has IRA accounts this may be an ideal time to do a Roth conversion.  Typically, if a Traditional IRA is converted to a Roth, tax must be paid on the converted amount.  A NOL can potentially make this a tax-free conversion.

For example:

Husband owns a small business and is married to a wife that is employed outside of the family business.  Let’s assume the husband has an IRA worth $200,000 and his wife earns $70,000 annually.  They also have dividend and interest income totaling $10,000.  The husband’s business generated a $200,000 loss:

Wife’s Earnings                                              $70,000
Interest/Dividends                                         $10,000

Total Income                                                 $80,000

Business Loss                                             ($200,000)

NOL for the year                                         ($120,000)
Roth Conversion (taxable income)                  $120,000

Net Taxable Income                                                $0

In this example, it may be possible for the husband to convert as much as $120,000 of his Traditional IRA to a Roth IRA tax-free.

Caution: This is an extremely simplified example.  Many other factors must be considered when using a NOL to make a Traditional to Roth conversion.  Please consult with a competent tax advisor before attempting such a conversion.

By converting a Traditional IRA to a Roth IRA you can now enjoy all the benefits that a Roth offers:

– Tax Free Distributions (after five years and beyond age 59.5)
– No Required Minimum Distributions at age 70.5
– The ability to name a beneficiary (example a grandchild) that can keep your investment growing tax-free for many years

Give us a call to discuss the details.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week. The economic conditions of 2010 have been particularly brutal for many small business owners.  When business expenses exceed business income it can create what is called a Net Operating Loss (NOL).  In very limited circumstances an individual taxpayer can also realize a NOL, but that discussion goes beyond the scope of this Tax Tip.

While losing money is never desired, it can turn into a very attractive tax planning opportunity.  If, for example, a business owner has IRA accounts this may be an ideal time to do a Roth conversion.  Typically, if a Traditional IRA is converted to a Roth, tax must be paid on the converted amount.  A NOL can potentially make this a tax-free conversion.

For example:

Husband owns a small business and is married to a wife that is employed outside of the family business.  Let’s assume the husband has an IRA worth $200,000 and his wife earns $70,000 annually.  They also have dividend and interest income totaling $10,000.  The husband’s business generated a $200,000 loss:

Wife’s Earnings                                           $70,000
Interest/Dividends                                      $10,000

Total Income                                               $80,000

Business Loss                                          ($200,000)

NOL for the year                                      ($120,000)
Roth Conversion (taxable income)            $120,000

Net Taxable Income                                             $0

In this example, it may be possible for the husband to convert as much as $120,000 of his Traditional IRA to a Roth IRA tax-free.

Caution: This is an extremely simplified example.  Many other factors must be considered when using a NOL to make a Traditional to Roth conversion.  Please consult with a competent tax advisor before attempting such a conversion.

By converting a Traditional IRA to a Roth IRA you can now enjoy all the benefits that a Roth offers:

– Tax Free Distributions (after five years and beyond age 59.5)
– No Required Minimum Distributions at age 70.5
– The ability to name a beneficiary (example a grandchild) that can keep your investment growing tax-free for many years

Give us a call to discuss the details.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

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