Thursday, October 27, 2011
Year-end Planning Insights for Roth IRA Conversions
1:29 PM | 
Posted by
pensionfinancialservices |
To switch your IRA to Roth before the end of this tax year, or not? That is the perennial question.
Since Roth IRAs offer a rare opportunity to generate tax-free retirement income-along with greater distribution flexibility than provided by traditional IRAs that merely defer tax, traditional IRAs generally can be converted to the Roth variety. We like what our friend Bob D. Scharin, Esq., a senior tax analyst for Thomson Reuters, who appeared at our event last spring, had to say about this opportunity: "Many pros and cons of doing so are perennial, but a special rule that delayed the tax on 2010 conversions adds new-for-2011 planning considerations," says Scharin.
We thought our customers should hear the thinking behind WHY?
Rule of Roths.
The advantage of contributions to Roth IRAs are not deductible. But distributions-including investment earnings-are tax-free if distributed when the taxpayer is at least age 591/2 and after a five-calendar-year waiting period. In addition, the distributions are not subject to the age 70 1/2 minimum required distribution rules. If funds are converted from a traditional IRA to a Roth IRA, the part of the converted amount allocable to pre-tax contributions and earnings is taxable for the year of conversion. If you think your tax rate will increase in future years, making a Roth IRA conversion in 2011 this year could be a wise tax move. You will pay tax on the conversion at 2011 tax rates and reap tax-free income down the road when your income would otherwise be more heavily taxed. But a taxpayer in this situation should consider limiting the conversion amount to avoid being pushed into a higher income tax bracket in 2011.
Says Kevin McCormack, Pension Parameters, “2010 was a great year to convert to Roth IRAs. You may recall that we were encouraging individuals to make Roth IRA conversions last year because of valuable incentives. One was that income limitation on conversions was eliminated, so that our customers with modified adjusted gross incomes above $100,000 could make a Roth IRA conversions for the first time. The tax law also allowed the income from 2010 conversions to be deferred to 2011 and 2012. " Says Scharin, “That was great last year, but for this year the tax comes due on one-half of the deferred amount.”
A taxpayer who is thinking about making a Roth IRA conversion before year-end should consider how piling the conversion income for 2011 on top of the deferred income from a 2010 conversion will affect his or her 2011 tax bill. It may easily push you into a higher tax bracket. Be sure to consult with your tax advisor to make certain the tax paid on conversion doesn’t exceed your tax savings. Do not hesitate exploring the Roth IRA option for 2011 by giving Kevin McCormack at Pension Parameters a call at (732) 583-1313, Pension Parameters Financial Services Inc.
Since Roth IRAs offer a rare opportunity to generate tax-free retirement income-along with greater distribution flexibility than provided by traditional IRAs that merely defer tax, traditional IRAs generally can be converted to the Roth variety. We like what our friend Bob D. Scharin, Esq., a senior tax analyst for Thomson Reuters, who appeared at our event last spring, had to say about this opportunity: "Many pros and cons of doing so are perennial, but a special rule that delayed the tax on 2010 conversions adds new-for-2011 planning considerations," says Scharin.
We thought our customers should hear the thinking behind WHY?
Rule of Roths.
The advantage of contributions to Roth IRAs are not deductible. But distributions-including investment earnings-are tax-free if distributed when the taxpayer is at least age 591/2 and after a five-calendar-year waiting period. In addition, the distributions are not subject to the age 70 1/2 minimum required distribution rules. If funds are converted from a traditional IRA to a Roth IRA, the part of the converted amount allocable to pre-tax contributions and earnings is taxable for the year of conversion. If you think your tax rate will increase in future years, making a Roth IRA conversion in 2011 this year could be a wise tax move. You will pay tax on the conversion at 2011 tax rates and reap tax-free income down the road when your income would otherwise be more heavily taxed. But a taxpayer in this situation should consider limiting the conversion amount to avoid being pushed into a higher income tax bracket in 2011.
Says Kevin McCormack, Pension Parameters, “2010 was a great year to convert to Roth IRAs. You may recall that we were encouraging individuals to make Roth IRA conversions last year because of valuable incentives. One was that income limitation on conversions was eliminated, so that our customers with modified adjusted gross incomes above $100,000 could make a Roth IRA conversions for the first time. The tax law also allowed the income from 2010 conversions to be deferred to 2011 and 2012. " Says Scharin, “That was great last year, but for this year the tax comes due on one-half of the deferred amount.”
A taxpayer who is thinking about making a Roth IRA conversion before year-end should consider how piling the conversion income for 2011 on top of the deferred income from a 2010 conversion will affect his or her 2011 tax bill. It may easily push you into a higher tax bracket. Be sure to consult with your tax advisor to make certain the tax paid on conversion doesn’t exceed your tax savings. Do not hesitate exploring the Roth IRA option for 2011 by giving Kevin McCormack at Pension Parameters a call at (732) 583-1313, Pension Parameters Financial Services Inc.
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