Do You Have a Traditional IRA and Wish Not to Pay Income Tax on Earnings when Rates are Presumed to be Higher?
Effective January 1, 2010 every taxpayer has the ability to convert a traditional IRA to a Roth IRA. Prior to 2010, many taxpayers were ineligible to convert to a Roth IRA due to limitations imposed by Congress. As a result of the Tax Increase Prevention and Reconciliation Act of 2005, the limitations in place were to be eliminated beginning 2010.
Now, taxpayers have the option to pay income tax at today's favorable rates and in return receive future tax-free income when rates are expected to increase.
In addition, for conversions occurring in 2010, taxpayers have the ability to recognize income on the conversion in the 2011 and 2012 tax years. The ability to recognize the income over multiple tax periods provides an excellent planning opportunity for taxpayers.
Below are several reasons to convert to a Roth IRA:
1. Younger taxpayers will experience a longer period of tax-free growth while currently paying income taxes at a reduced marginal rate.
2. For taxpayers who have favorable tax attributes (i.e. net operating loss carryforwards, charitable deduction carryforwards, and tax credits) the income recognized on conversion can be sheltered.
3. With the current economic conditions some taxpayers have lost a portion of their overall IRA investments. Converting the IRA now enables the taxpayer to pay income tax on a reduced value.
4. The minimum distribution rules at 70 ½ are not applicable to Roth IRAs.
5. Converting to a Roth IRA will reduce the taxpayer’s overall estate value, thereby lowering the effect of anticipatory higher estate taxes.
6. Tax rates are increasing in the foreseeable future.
7. Beneficiaries will continue to enjoy tax-free growth on Roth IRA investments.
Although a Roth IRA conversion is a great planning opportunity, it is not for everyone.
Certain taxpayers can end up paying more in tax, in both a short-term and long-term analysis. It is imperative that your financial and tax landscapes are analyzed prior to a conversion being undertaken.
Please contact Marc Simmons if you are interested in learning more about Roth IRA conversion and what Elko can do to assist you with your decision.
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