I had a question come up to me last week that I thought would be fun for me to

tackle as the topic of today's show because it brings together a little bit of

technical financial planning with some discussion of various scenarios and gives me a

chance with a real world example to talk

through a few strategies that I want you to be aware of.

Listener asks this, I want to make sure that I'm not losing my mind. I know somebody

who is 72 years old who has a traditional IRA who is thinking

of converting some of that IRA to a Roth IRA. They call their advisor at Merrill Lynch

today and he told them they would only pay taxes on the contributions and that the gains would roll over into a Roth IRA tax-free.

This seems to me to be incorrect advice, everything rolled over to the Roth, contributions and gains would be taxable as income.

Any rollover amount would have to be above and beyond the required minimum distributions and

then obviously any new gains would come out tax-free is that right? I think this

guy was a certified financial planner. So the scenario here to make it a little bit

simpler is that you have a 72-year-old person with a traditional IRA who is trying to figure out what are the rules of converting some to a Roth IRA.

Now, let's start with why somebody would want or not want to do such a conversion.

When you have a traditional IRA, and that IRA could be accumulated either from a rollover,

from some sort of qualified pension plans such as a 401k or a 403b plan or it could simply

have been accumulated over time with systematic yearly contributions.

But when you have a traditional IRA, one of the things that happens is about the age of 70,

you start to have what are called required minimum distributions.

Remember how the money gets into an IRA in the first place.

The money gets in before taxes are paid.

...