Pablo and his wife Bernita are both age 58. Their combined AGI is $99,000. Neither is a participant in an employer-sponsored retirement plan. They have been contributing to a traditional IRA for many years and have built up an IRA balance of $120,000. They are considering rolling the traditional IRA into a Roth IRA. Required:
a. Is the couple eligible to make the conversion? Why or why not?
b. Assume that the couple does not make the conversion but, instead, establishes a separate Roth IRA in the current year and properly contributes $2,000 per year for four years at which point the balance in the Roth is $21,000. At the end of four years, they withdraw $12,000 to pay for an addition to their house. What is the tax effect, if anything, of the withdrawal?
c. Does your answer to (b) change if they withdraw $6,000? Why or why not?
d. What if the $12,000 withdrawal is used to pay qualified education expenses for their daughter who is attending college?