|
The grass is greener on the other side of the fence. This familiar proverb may describe the feelings of high-income investors who have been unable to convert retirement accounts — including Traditional, Rollover, SEP and SIMPLE IRAs — into Roth IRA accounts because of income limits. What makes Roth IRAs so attractive? Instead of offering a tax break today, like Traditional IRAs, withdrawals from Roth IRAs are tax-free, assuming minimum requirements are met.
Is tax-free income during retirement better than a tax break today? For some individuals, tax-free income may have greater benefits; for others, a current tax break may be more valuable. If you’re not sure which would be best for you, this is the year to find out. During 2010, all investors have an opportunity to convert retirement accounts into Roth IRAs, regardless of income level. Here are some factors we can discuss:
• Will your tax rate be different when you retire?
If you expect to be in a higher tax bracket after retirement, you may want to consider a Roth conversion. If you expect to be in a lower tax bracket after you retire, a tax break today may be more valuable.
• Do you have liquid assets with which to pay the conversion tax?
All pre-tax contributions — and any earnings — transferred from a Traditional IRA to a Roth IRA are subject to federal and, possibly, state income tax. If you use part of the proceeds from a conversion to pay the tax, that amount may be subject to early withdrawal penalties. As a result, it’s important to roll over the converted amount and pay taxes with liquid assets. If you have the assets to pay taxes separately, a conversion may be a sound choice. If you don’t, it may not. During 2010, the tax owed on conversion amounts may be paid over two tax years. Onehalf of the amount converted will be included on your 2011 tax return and the other half will be included on your 2012 tax return.
• Has the value of your retirement accounts declined?
If the value of your Traditional IRA, Rollover IRA or another retirement account has declined, the taxes owed when you convert to a Roth IRA may be lower than they would be otherwise. If your account value is lower than it has been in the past, it may be a good time to convert to a Roth.
• When will you begin making withdrawals from a Roth IRA?
If you will begin making withdrawals within the next five years, a Roth conversion may not be the right choice. Distributions from Roth IRAs are tax-free if the assets have been held in the account for at least five years and there is no Required Minimum Distribution (RMD) during your lifetime.
• Do you want to pass along your wealth to heirs?
Conversion to a Roth IRA requires the payment of any necessary taxes upfront, but will also assist in shrinking your taxable estate. This provides you with the opportunity to bequeath the select Roth funds tax-free to your heirs.
While the benefits of tax-free growth and tax-free retirement income are alluring, it’s essential to make sure that a Roth conversion fits your needs before taking action. Feel free to contact me, as well as your tax professional, to determine whether you should take advantage of the opportunity to convert to a Roth IRA during 2010.
__________________________________________________________________________________________________
|
