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New Opportunities in Roth IRAs Beginning January 1, 2010, individuals at all income levels will be eligible to convert a traditional Individual Retirement Arrangement (IRA) to a “Roth” IRA. This conversion represents a long-term tax saving opportunity that has previously been restricted only to taxpayers filing single or joint returns with adjusted gross income under $100,000. In many cases, the initial tax cost of converting to a Roth IRA will be far outweighed by the very substantial income tax and estate tax savings in the future. IRAs – A Brief History So-called “traditional” (non-Roth) IRAs have been available for a generation. Funding a traditional IRA once automatically resulted in a deduction on your personal income tax return; later, such deductions became limited. Once funds are withdrawn from the IRA (normally after age 59 1/2), taxes are due on most if not all of the proceeds. Beginning at age 70½, annual distributions become mandatory. In 1998, Roth IRAs were introduced and made available to taxpayers whose income was below certain designated levels. While contributions to a Roth IRA are never deductible, they offer three enormously taxpayer-friendly advantages: (1) after the account is open for five years, all withdrawals after age 59 ½ are completely tax-free, including all earnings; (2) the requirement to withdraw funds beginning at age 70 ½ is waived, presenting an opportunity to pass the IRA intact to the next generation; (3) you can change your mind. If, for example, your IRA declines in value after a conversion, meaning you paid taxes on a higher balance than you later possess, you have until the extended due date of your return to revoke the conversion and recoup any conversion taxes you paid. For conversions made in 2010, the revocation deadline can be as late as October 15, 2011. To convert a traditional IRA to a Roth IRA, you need to (1) complete the paperwork instructing the IRA custodian convert the IRA, and (2) pay income taxes on (usually) the entire balance in the IRA. If the conversion takes place in 2010, taxpayers will have the option of either reporting the entire taxable conversion on their 2010 return, or declaring none in 2010, half in 2011 and the other half in 2012. Since income tax rates are widely predicted to rise after 2010, it may be wise to consider paying the tax in 2010. It should be noted that Roth conversions are not an “all or nothing” proposition; any portion of a traditional IRA can be converted to a Roth IRA, up to and including 100%. Who Should Convert to a Roth IRA? While no two situations are alike, persons most likely to benefit from a Roth conversion are the following:
An Example In 2010, Husband, age 50, converts his traditional IRA to a Roth IRA, paying the conversion tax. Husband passes away at age 75, with Wife inheriting the IRA as sole beneficiary. Wife lives another ten years, and then passes the IRA to Child, who has a life expectancy of twenty-five years. What tax benefits have been created?
Evaluating Your Own Situation Anchin’s Employee Benefits Group combines its expertise and knowledge with sophisticated software tools to evaluate whether a Roth conversion makes economic sense and illustrate the projected financial benefits. You need only provide select information that addresses the pertinent facts of your situation, and we will do the rest. Please contact your Anchin relationship partner if you would like to consider the potential tax savings of converting your traditional IRA to a Roth IRA. |
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