A New Opportunity with Roth IRA Conversions
December 16, 2009 | 
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In January 2010, there will be dramatic changes in planning for Individual Retirement Accounts. Higher income individuals will now be able to take advantage of a conversion opportunity once limited to those taxpayers with an adjusted gross income less than $100,000. The answer to the question “Should I convert to a Roth IRA,” however, is not a simple one.
THE ROTH IRA CONVERSION RULES Currently, taxpayers can convert traditional IRAs and qualified retirement accounts, such as 401(k) accounts, to a Roth IRA as long as their adjusted gross income is under $100,000. In 2010, and for all subsequent tax years, the $100,000 limit is eliminated and all taxpayers will be permitted to convert certain retirement assets to a Roth IRA.
The amount converted to a Roth IRA will be included as ordinary income for the year in which the account was converted. However, for conversion in 2010 only, taxpayers can elect to defer half of their tax liability to 2011 and the other half to 2012.
The Roth IRA can grow and be distributed tax-free as long as distributions are not taken within five years of the first contribution or conversion, and not until after age 59½.
ROTH IRA CONVERSION CONSIDERATIONS Among the factors to consider when converting retirement assets to a Roth IRA include investment timeline; available assets to pay the resulting income taxes; current income tax bracket; anticipated income tax bracket in retirement; and whether income tax rates might be lower or higher in the future. Whether a Roth IRA conversion makes sense will depend on some of these factors and each individual’s specific financial and estate planning goals and objectives.
POTENTIAL REASONS TO CONVERT TO A ROTH IRA There are a number of potential reasons to convert retirement assets to a Roth IRA. Some of the more compelling ones are:
1. Many retirement accounts have recently lost value. Conversion now would result in a lower income tax liability and the ability to shelter any future growth from income taxes. 2. A conversion to a Roth IRA can be “recharacterized” back into a traditional IRA with no tax consequences up to the tax filing deadline, plus extension, for the year of conversion. This provides great flexibility in planning, from both a tax and investment perspective. 3. The ability to recharacterize allows for the diversification of asset classes among multiple Roth IRAs. Those that decrease in value during this period can be recharacterized and those that increase in value can remain Roth IRAs, subject to individual investment and other considerations. 4. If funds outside the IRA are available to pay the income taxes on conversion, the entire amount of the converted IRA will be available to grow tax-free. 5. The conversion provides a hedge against possible increases in income tax rates for future years when distributions may be made in retirement. 6. Unlike traditional IRAs, there are no required minimum distributions from Roth IRAs starting at age 70½. Therefore, if Roth IRA funds are not needed in retirement, the entire Roth IRA can continue to grow tax-free and provide a much larger inherited account for beneficiaries. 7. Additionally, the beneficiaries of the Roth IRA can then stretch the inherited Roth IRA account tax-free over their lifetimes by taking only the minimum required distributions each year. This allows the undistributed account to remain invested and continue to grow tax-free.While considering the possibility of a Roth IRA conversion, this is also an excellent opportunity to review and update beneficiary designations on all retirement accounts because they, not your will, usually control the disposition of the accounts at death. Glass Jacobson’s position as a comprehensive wealth management firm provides us the advantage of having professionals who can address all income tax, estate and investment aspects of the decision making process. Please contact us to discuss your particular situation.
Submitted by Gary Anderson
Questions:
gary.anderson@glassjacobsonIA.com
