Many individuals will have a significant new retirement and estate planning opportunity beginning in 2010. Previously, individuals with modified adjustable gross income of more than $100,000 were not permitted to make Roth IRA conversions.
The May of 2006, Tax Increase Prevention and Reconciliation Act (TIPRA) changed the Roth IRA conversion rules. The Act eliminated the $100,000 income limitation related to the eligibility to convert IRA accounts to Roth’s for tax years after 2009. This change will allow higher income individuals who previously have been unable to accumulate Roth accounts to finally do so. In 2010, individuals, regardless of income level, will be able convert deductible, nondeductible, rollover and SEP IRA’s to Roth IRA’s.
The Act also includes a wrinkle related to the timing of taxation on converted amounts. Individuals that convert in 2010 have the option of paying all of the associated taxes in 2010 or paying half in 2011 and half in 2012. Currently, this option is only available for conversions that take place in 2010. This is an important consideration given that it is widely assumed that post-2010 tax rates will be higher
There are many factors to consider before converting, but generally the ideal candidates are:
- Individuals who believe their effective tax rate at conversion will be lower than when they begin taking withdraws from their retirement accounts
- Wealthy
- Young, high-income earners
- Need to reduce estate costs at death
- Will not need to take distributions from converted accounts anytime soon
In addition, there are some other items to keep in mind when considering a Roth conversion:
- All IRA accounts are not required to be converted; partially conversions are permitted.
- Individuals cannot pick and choose which accounts get converted. Conversions follow the IRA distribution rules that are based on the ratio of deductible and nondeductible account balances to the total of all IRA account balances.
- Roth IRA accounts are not subject to the required minimum distribution rules.
- Each individual’s personal tax situation is different and will need to be analyzed to determine if and when a Roth conversion makes sense.
If you have any questions or would like to discuss this further, please contact Mark Flanagan at 301-231-6257