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The Roth IRA Conversion Opportunity – Is it Right for You?

January 06, 2010

By Mary Hoyt, CPA
Partner
BlumShapiro

Effective January 1, 2010, for the first time, a new federal law allows individuals who have modified adjusted gross incomes in excess of $100,000 a year to have access to the tax and estate planning benefits of Roth IRAs. This means that, unlike in previous years, people of higher incomes are eligible to convert their Traditional IRAs to Roth IRAs. This significant change in the tax law is one many people may want to look into this year as it may have significant benefits for them. Now that they are eligible, the question people now may want to ask is this: Is a Roth IRA conversion/rollover opportunity right for you?

The Facts

  • This change in the law involving Roth IRAs is an important opportunity, because Roth IRAs were not available to people with modified adjusted gross incomes of more than $100,000 a year prior to January 1, 2010.
  • There are numerous benefits to investing with Roth IRAs rather than traditional IRAs. These include:

              a.    Tax-free compound growth of assets and earnings; 
              b.    Tax-free distributions after 5 years (providing certain rules are met); 
              c.    No "Required Minimum Distributions" (or "RMDs") means additional 
                     wealth-accumulation potential and legacy advantages; and
              d.    Contributions permitted after age 70 ½ and as long as you have earned income.

  • Now may be the best time to convert to a Roth IRA for the following reasons: 
     
  • People with traditional IRAs still need to consider a variety of issues before making the decision to convert – this is not a "one size fits all" situation. Here is a quick primer to help determine if converting is a good idea for you:
     
  • Converting Could Work For You If:

                    • You want tax-free distributions in retirement;
                    • You believe you will be in a higher income tax bracket when those 
                       distributions begin;
                    • You won't need access to the money for at least five years;
                    • You don't anticipate needing all of your IRA assets for retirement and would like to
                       extend their tax-free growth potential for your heirs;
                    • You have losses for the tax year to offset the ordinary income created by 
                       the conversion.

  • Converting May Not Work For You If:

                   • You believe your income tax rate will stay the same or drop in retirement;
                   • You don't have enough cash in a taxable account to pay the taxes due on
                      the conversion;
                   • You're planning to leave your IRA assets to a charity.

  • As always, it makes sense to consult a tax professional before making this decision 
    on converting to a Roth IRA. But if it is the right decision, this change in the law, effective January 1st of this month, gives the opportunity for major investment benefits, both today and into the future.
 

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