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2010: NEW OPPORTUNITIES FOR ROTH IRAs:
Two important changes next year
1. The income limits on Roth IRA conversions have been eliminated! After 2009, income tests for eligibility to convert an IRA to a Roth are eliminated. Note that you still cannot contribute directly to a Roth IRA if your adjusted gross income exceeds $176,000 for joint filers in 2009 or $120,000 for most single filers in 2009.1 However, with your ability to make a non-deductible contribution to a traditional IRA (no income limitations, no tax deferral on the contribution) and then CONVERT to a Roth (no income limitations on conversions) the income limitation on contribution has effectively been eliminated also!
2. Income Taxes on conversion may be deferred! Amounts withdrawn from an IRA to convert to a Roth IRA will be taxed. However, if you convert in 2010, you have two options: you can pay the entire tax in 2010 OR pay no tax in 2010 and spread the tax payments over 2 years, including one-half of the conversion in income in 2011 and one-half in 2012 – potentially deferring the final tax payment until you file your 2012 return in 2013! Note also that taxes should be paid from funds other than the IRA conversion account to maximize the benefit of converting to a Roth.
Roth IRAs offer many potential advantages:
· Tax-free growth
· Tax-free withdrawals (you must be 59½ or older to withdraw earnings tax – free and the Roth IRA must be more than 5 years old)2
· Eliminate the required minimum distribution requirements of traditional IRAs
· Maximize the legacy you leave to beneficiaries
When does this make sense? If you do not need to touch the IRA for a number of years, think your tax bracket may be higher when you retire, or plan to leave the proceeds to your heirs AND can afford to pay the income taxes from other sources, a Roth conversion may make good sense. Also, if your market values are down, it’s an opportunity to move it with less taxable gain. When the stock market recovers, the future growth will be tax free.
CAUTION: There are special rules for converting non-deductible IRA to a Roth IRA. Many people deposited money into non-deductible IRAs with the goal of converting in 2010 and this may work well. In considering this option, be aware that special rules apply.
Taxpayers also need to consider how the conversion might increase Adjusted Gross Income (AGI) and affect their deductions or personal exemptions, taxation of their social security benefits and tax credits.
Don’t Forget: Your personal and tax situation is unique. Before you make a move with your IRA, talk to a Symphony Financial advisor or a tax professional who understands the coming rules modifications.
Securities and Investment Advisory Services offered through Cambridge Investment Research, Inc., Broker/Dealer, Member FINRA/SIPC. Symphony and Cambridge are not affiliated.
Citations.
1 irs.gov/publications/p590/ch01.html#d0e4941
2 aarp.org/money/financial_planning/sessionseven/roth_iras.html
3 fairmark.com/rothira/inherit.htm
4 nysscpa.org/cpajournal/2007/507/essentials/p48.htm
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