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January 1, 2010 - Agnes
Migiel
Traditional IRA Could Now be
Rolled Over into an IRA Roth
Starting January 1, 2010, a
new tax law will be in effect in which the $100,000 adjusted gross income
limit disappears for converting Traditional Individual Retirement Accounts
and employer-sponsored retirement plans to a Roth IRA.
With a Traditional IRA,
investors must begin to withdraw from their accounts after reaching age
70-1/2, which increases taxable income. There are no required distributions
for a Roth IRA during the owner's lifetime, which results in greater
flexibility and more choices when managing investments and cash flow.
One of the most important
items to consider when converting an IRA is identifying the best source of
funds to pay the taxes. Converting to a Roth can be expensive - it requires
paying income tax on all pretax contributions and earnings included in the
amount converted.
To lessen the impact of
this tax expense, it is possible to spread the income taxes due on 2010
conversions over two years. Thus, the conversion amount may be included as
taxable income in both 2011 and 2012. In subsequent years, however,
conversions are included in income during the tax year in which they are
completed.
It has been accepted and
argued that converting makes sense only if an investor can pay the tax from
funds outside the IRA itself, as it gives investors the biggest advantage:
the more IRA dollars transferred to a Roth, the bigger the Roth and the
greater the chance for long-term tax-free growth.
Even though individuals who
convert and who decide to pay the taxes with funds inside their IRA are
lowering their overall IRA balance, their new Roth account eliminates the
requirement to make taxable withdrawals after age 70-1/2. *In some cases,
this allows individuals to stay below the threshold at which much of their
Social Security checks would be taxed; avoiding higher Medicare premiums
(which are tied to income levels) may also be possible. Some individuals may
also be able to leave larger amounts of money for beneficiaries, since
inherited Roth IRAs aren't subject to income tax.
ADDITIONAL POINTS TO
CONSIDER:
-
Those considering Roth
conversions should consult a tax professional and/or a local accountant.
Wisconsin didn't drop the $100,000 income limit, meaning residents over
that limit face a penalty for Roth conversions. There may be similar
cases in other states.
-
IRA owners with
Medicare Part B who convert to a Roth may be subject to higher premiums
for a period of time.
-
Investors under age
59-1/2 who convert to a Roth may pay an early-withdrawal penalty on IRA
assets used to pay tax.
If you decide that you
would like to convert your Traditional IRA into a PRCUA Roth IRA, please
contact the Sales and Marketing Department: 800-772-8632, Anna Trush ext.
2633 or Agnes Migiel ext. 2632.
Please contact a
qualified tax professional before making any major financial decisions that
may have tax implications.
(Information Source: The
Wall Street Journal, December 12-13, 2009) |
