Evaluate Your IRA Before the New Year
I encourage you to evaluate your IRA before the new year, as the tax laws regarding Roth IRA conversions are changing effective January 2010. If your adjusted gross income is above $100,000, you will have the option of converting an existing traditional pretax IRA to a Roth IRA. In previous years, this option was only available to those making less than $100,000.
When you’re evaluating your IRA and making a decision to invest in a Roth IRA, consider the following:
- Direct contributions can be withdrawn tax free any time.
- Earnings may be withdrawn penalty free after five years.
- Assets in your Roth can be passed to your heir’s tax free.
- No withdrawal requirements when you reach a certain age (70 ½), so your money can continue to accumulate tax free.
Key attributes of a Roth Conversion include:
- Any investor with a Traditional IRA, Rollover, SEP or 401(k) plan is eligible.
- For the 2009 tax year, your adjusted gross income must be $100,000 or less.
- For 2010 and beyond, the income restriction will be lifted and anyone will be eligible to convert.
- Conversions are a distribution from the Traditional IRA and therefore a taxable event.
- A conversion may cause you to increase your tax bracket.
- For the 2010 tax year, you have the option of applying 50% of the conversion amount to the 2011 tax year and 50% to 2012, or pay 100% in 2010.
- If you convert to a Roth and discover that you were ineligible or that the conversion is not tax advantageous to you, you can reverse the conversion. This is called a “recharacterization”.
A Roth conversion is best suited for you if you meet all three of the following criteria:
- You will be in the same or higher tax bracket by the time you retire.
- You won’t need to withdraw the money for at least 10 years.
- You have cash on hand to pay the income taxes for the conversion.
Investors need to be aware of all of the tax implications and rules of the conversion to make the right decision for their investments.
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