Congress suspended Required Minimum Distributions (RMDs) from retirement accounts for 2009, and since many people did not know about the suspension they are giving them the option to roll any 2009 RMDs back into the retirement account by November 30th. If this relates to you, and you have questions, give us a call.
Too Much Income for a Roth Conversion??? Think Again…
To complete a Roth conversion in 2009 your adjusted gross income must be $100,000 or less, whether you’re married or single. Additionally, if you’re married you cannot convert if you file separately. But, in 2010 things change. The income limit disappears along with the married filing separately restriction. In other words, anyone can do a Roth conversion in 2010 and future years.
To sweeten the deal, if you convert to a Roth IRA in 2010 Congress allows you to spread the taxable income evenly between 2011 and 2012, or you can elect to pay all the tax in 2010. Only by taking a close look at a multiple year tax projection, can you decide the best way to handle the tax; however, getting an interest free loan to pay the tax over a couple of years has merits.
What is a conversion? – With a conversion you elect to take a regular IRA and convert it to a Roth. This transaction will most likely create immediate taxable income equal to the value of the amount converted, minus any after tax contributions. Once the money is in the Roth all future distributions are completely tax free (assuming you meet certain IRS rules).
Why Convert? - If you’re in a lower tax bracket today than you are likely to be in the future, converting to a Roth and paying the taxes now, at lower rates, may be especially good. The idea is to pay taxes whenever you’re in the lower tax bracket. Furthermore, to get the full benefit of the conversion the associated taxes should be paid from cash outside the IRA.
But there can be other advantages to a Roth as well. Roth IRAs are not subject to RMDs like all other IRA’s and retirement plans that must begin taxable distributions at age 70.5. With a Roth there are no rules requiring distributions during your life, making the Roth a tremendous vehicle for long-term tax free compounding of growth.
It may be nice to have a Roth in your tax planning “tool kit.” Let’s say you are 66 and planning for a big vacation, but you already have sizable taxable income for the year. Having a Roth to take a “tax free” distribution from may be a nice thing to have.
A Roth is a great asset for legacy planning to pass on to future generations. It doesn’t come with a tax bill attached (the beneficiary gets to take tax free distributions), and they can “stretch” out the distributions over their life expectancy. For a 20 year old that might be 60 years. This dramatically increases the compounding of the tax free growth.
A Roth conversion does not have to be an all or nothing decision. Meaning, you can decide to convert only part of your IRA to a Roth each year. This gives rise to doing some opportunistic conversions – converting a portion to a Roth in years in which you may be in a lower tax bracket, but this requires some tax and cash flow planning to pull off.
There are a lot of details in deciding to make a Roth conversion. If you’d like to learn more give us a call.