March 23, 1998

Q. I am in the process of converting our traditional IRAs into Roth IRAs. Their current value is approximately $84,000, of which $71,000 represents capital gains. I plan on spreading out the taxes due from this transfer over a four-year period as is currently allowed. I am wondering if the taxes due will be based on my projected 28 percent tax bracket, or are the gains eligible for being taxed at the lower rates for capital gains that went into effect this year.

R.K., Spring Valley, Calif.

A. Sorry, but the answer is no. Taxes on the transfer of a traditional IRA to a Roth IRA are levied just as they would be on withdrawals from the IRA -- as earned income. The logic is that these accounts represent money that went in on a tax-deferred basis and any growth you have enjoyed should be treated similarly.

Thus, transferring your traditional IRAs to Roths and spreading the taxes out over the four-year period (allowed only in 1998) will mean $21,000 added to your taxable income each year -- boosting your tax liability by $5,880 each year -- unless the additional income drives you into a higher tax bracket.