High Wage Earner Wants to Get In on the Action With Conversion to New Roth IRA

Q: I really want to convert my traditional individual retirement account to a new Roth IRA. My only concern is that I might make too much money to meet the $100,000 limit on adjusted gross income that the government sets as a qualification for making a conversion. It’s possible that my adjusted gross will make the limit, but just barely. To complicate matters, I want to make the conversion this year because 1998 is the only year in which taxpayers can make a conversion and spread the tax liability on the converted funds over four years. What should I do?

--D.S.

A: As you know, the federal government limits Roth IRA conversions only to those taxpayers, whether single or married filing jointly, whose adjusted gross income does not exceed $100,000. The hard part for some taxpayers is knowing whether or not you can meet the requirement and, more important, what the consequences are if you convert your traditional IRA to a Roth before knowing for sure whether you’ll exceed the income ceiling.

The experts I spoke with suggest that if you aren’t sure you can make the cutoff, you should wait to convert until as late as possible during the current calendar year, when you presumably will know better your annual income and the government will have made its policy on mistaken conversions known.

These experts say the government still hasn’t made it clear whether it will assess a penalty on taxpayers who convert in the mistaken belief that they would meet the $100,000 adjusted gross income limit. It’s possible there won’t be a penalty if an “illegal” conversion is undone before a taxpayer files a tax return. But it’s also possible that the government will assess a penalty on improper conversions, perhaps as much as 10%. Nothing is certain yet.

The trick, of course, is determining your 1998 income as quickly as possible. If you wait until the year is over, your chance to convert your IRA to a Roth in 1998 (and thus take advantage of the four years in which to pay taxes on the converted amount) will have passed. If you convert in 1999 or later, you must pay the taxes in a single year.

Perhaps there are steps you can start taking to keep your income under the limit. Can you postpone a bonus to 1999? Or can you ask an employer to push a paycheck or two into next year? If you want to be really creative and your finances and job are secure, you could consider taking an unpaid leave for a month or so this year.

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Q: In the late 1940s, I started purchasing American Telephone & Telegraph stock through a payroll-deduction plan. I also started participating in the dividend reinvestment plan. When AT&T; divested the regional Bell operating companies in 1985, I then received shares in each of those companies. Now many of these Baby Bells have merged, spun off subsidiaries. Even AT&T; has split itself into three companies.

Obviously, my telecommunications stock portfolio has drastically changed since the early days of having only AT&T; shares. I have been unsuccessful in determining the purchase price of every company stock that I now own. How can I determine my taxable gain when I go to sell these shares?

--G.C.S.

A: Unless your records are in incredible shape--and it’s hard to imagine they are, given the five decades you have been at this investment--you’re not in an enviable position. Even if your records are in fairly decent shape, you face a lot of detailed paperwork. (Stock maneuvers that include multiple splits, spinoffs and mergers are one reason many investors prefer to keep their portfolios in “street name” at their brokerage house since the record-keeping of brokers is usually far superior to that of mere investors.)

So what can you do now? The easiest solution would be to leave the whole mess to your heirs and let the tax basis value on the portfolio be reset as of your date of death. That way, everyone skips the most tedious of the paperwork. It’s an expedient solution, but not one that gives you any direct benefit, unless you count work avoidance in this lifetime and the accolades of your heirs in the next as benefits.

Another potential avenue--assuming you at least have records showing how much money you have actually invested in these companies either directly or through dividend reinvestment plans--is to simply sell your entire telecommunications portfolio at once. This allows you to deduct from your proceeds the amount that you have actually invested in the stocks and declare the difference as taxable. Of course, you’ll face a potentially large tax bite if you follow this plan.

A less appealing option is to trace the tax basis of your holdings. For this you’ll want to make a list of each telecommunications company in which you know you have at one time or another invested.

(AT&T;, for example, spun off its regional Bell operating companies in 1984, and shares in each of the Bells were issued to AT&T; shareholders. Four of these Bells have since merged into two sets of two (Pacific Telesis with SBC Communications, the former Southwestern Bell; and Nynex with Bell Atlantic), leaving only five siblings. Before its merger, Pacific Telesis itself spun off its cellular operations into a company now known as AirTouch. And within the last 18 months, the post-divestiture AT&T; has split itself into an three publicly traded companies, AT&T;, Lucent Technologies and NCR Corp.

But you shouldn’t stop here. Be sure to check on the activities of each of the Baby Bells, because at least one or more of them have spun off operating units or completed other transactions that affected shareholders.)

Next, you’ll want to gather whatever paperwork you have to determine what, if any, account numbers you might use to identify your holdings. You then must get phone numbers for the investor relations departments of each of the surviving companies. Nelson’s Guide, an annual compendium of publicly traded companies, would be a good source; it’s probably at your public library.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi@latimes.com