Roth IRA Conversion Opportunity in 2010
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By :
Andrew Shultz
Submitted
2010-01-24 21:02:42 |
Starting in January 2010, anyone can convert their traditional IRA accounts to Roth IRA accounts. In the past this conversion was based on the adjusted gross income(AGI) and most individuals with annual AGI were not allowed to convert to Roth IRA.
In United States, more than 20 million investors have adjusted gross income of more than $100,000. These people will now be able to convert their traditional IRAs into Roth IRAs due to new regulations. Most of the financial professionals are debating whether this is a good opportunity to convert some or all of your traditional IRA into Roth IRA.
As you may already know there is a tax implication if you decide to convert. You will be taxed on the conversion amount if it hasn't been taxed when you contributed to your traditional IRA. Main question here is to figure out whether to pay taxes now or in future.
Converting traditional IRAs to Roth IRA may not be right for all investors but it could make sense if:
- You're an investor who can leave the money in the account for five years or more until you reach at aleast 59-1/2.
- You expect your tax rate to rise in future and you would rather pay your taxes now and get done with it.
- You have additional funds that can be used to pay taxes on your traditional IRA conversion allowing you to retain significant balance in your new Roth IRA account.
Looking deeper into the question of conversion, most people would have following questions:
What are the Consequences of Converting Now?
Obviously converting your traditional IRA to Roth IRA means that you pre-tax contribution to traditional IRA will be taxed at your ordinary tax rates. Therefore you may have to come up with a significant amount of money in tax bill. Also, conversion can be complicated if you have multiple traditional or simple IRA accounts since you will have to add them all up to figure out how much of the conversion will be taxed - even if you aren't converting all of them.
Is There a Value in Converting Now?
For most people, there is. You can withdraw money tax free later. This is a significant advantage when compared to traditional IRA, where withdrawals or distributions are taxed as ordinary income. There are few stipulations, however. To take tax-free distributions, you must wait at least five years after your initial contribution or latest conversion and you must be at least 59-1/2 or disabled. You can, however, purchase your first home with Roth IRA funds tax free even if you're younger than 59-1/2 so long as you've met the five-year holding period. With Roth IRA, there are no required minimum distributions. With Roth IRA, you aren't required to take minimum distribution until age 70-1/2.
Are There Any Other Benefits?
Actually, there are. You can use this as an effective estate planning tool. Your beneficiaries will inherit the money from your Roth IRA income-tax free. They might, however, be subject to minimum distributions. Your spouse may have exceptions to this rule.
Do I have to Pay All the Tax Now?
Actually No. To help ease the pain of tax bill, Congress has approved a special rule for conversion that are completed in 2010 only; You can treat half of the income from the conversion
as received in 2011 and the other half in 2012. This special rule will allow you to spread the tax liabilities over the period of two years instead on just one.
Are There Other Assets That Can Be Converted?
You can convert any defined-contribution plan money. If you're eligible to take distribution, you are eligible to convert. This could be a great opportunity for people who lost job in 2009 as they can convert their define-contribution plan money if they can afford not to dip in their retirement money for regular bills.
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Article From Fiscalwealth | Personal Finances, Investment and Wealth Management
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