JANUARY 2010 - Roth IRA Conversion
Paul Wade, CPA
With 2010 upon us, most everyone has probably heard something about Roth IRA conversions and how even high-income individuals can convert now.
I’ve heard about Roth conversion from multiple financial advisors;
I’ve been invited to seminars covering the topic;
I’ve seen advertisements in newspapers and magazines; you can’t miss it.
Many of these marketing pieces make it sound like conversion from traditional IRA to Roth IRA is a complete “no brainer”. However, this is not entirely true. It really depends on your individual facts and circumstances.
It is true that this is a great opportunity and, in many cases, substantial tax savings can be achieved. However, there are some drawbacks. Conversion results in immediate taxable income. The amount converted has to be picked up as ordinary income in 2010 or it can be spread between 2011 and 2012. Either way, you are going to be paying tax upfront and ideally you would want to pay this tax out of other funds -- not your retirement nest egg. Once you convert, the money has to stay put for five years before it can be withdrawn tax free. On the bright side, the government will allow everyone a “do-over”. Once you convert, you have a period of time when you can change your mind and switch back to the traditional IRA.
As I said earlier, whether or not you should convert really depends on your individual facts and circumstances. It isn’t for absolutely everyone under the age of sixty-five with a job. And in some cases, it makes sense for retired individuals to convert. Conversion can be an effective estate planning tool because an individual can save estate taxes on the income taxes they pay. Wrap your head around that seemingly ludicrous statement! Bottom line, you really need to sit down and run the numbers to see if there is a tax benefit.
If you have questions about conversion and whether or not it makes sense for you, please contact your accountant or call Serotta Maddocks Evans & Co., CPA’s. We can help you make the best decision possible so you can hold on to your hard earned cash.