Roth IRA Conversions
Are you one of the
thousands of investors who thought you would never qualify for a Roth IRA?
Have you been excluded from one of the most powerful wealth building tools
because you income was too high? Well get ready for a change..
1997 – Roth IRA tax conversion laws were written allowing one to convert
from a traditional IRA to a Roth IRA. However, there were 2 major
stipulations that tax payers had to worry about – paying taxes on the
converted money and an income limit which determined one’s eligibility to
convert.
With a traditional IRA money can be placed into the account on a pre-tax and
after-tax basis. The investment is then allowed to grow on a tax-deferred
basis until withdrawn in retirement. If an individual wanted to convert
their traditional IRA to a Roth IRA they had to pay federal income taxes on
any pre-tax contributions as well as any growth in the investment’s value.
This is because once converted to a Roth, all of the investment could now be
withdrawn on a tax-free basis in retirement.
Unfortunately, the 1997 law also contained a provision limiting who could
make a conversion. Upper income tax payers – those with an adjusted gross
income (AGI) of more than $100,000 (whether single or married) were not
eligible to make such a conversion
These two tax laws
effectively precluded upper income taxpayers from enjoying the benefits of a
Roth IRA.
2006 – George Bush signs a $70 billion tax cut provision that changed the
eligibility rules for Roth IRA conversions.
Starting in 2010,
taxpayers with modified AGI of more than $100,000 will be allowed to
convert a tradition IRA to a Roth IRA. This change applies to all years
beyond 2010, and furthermore, the income taxes due on the 2010 conversion
can be spread over two years. So the 2010 conversion amount may be included
as taxable income in 2011 and 2012 - helping to spread out the tax
bite. Conversions in subsequent years are included in income during the tax
year in which the conversion is completed. Removing the Roth IRA conversion
cap however doesn't mean anyone can fund a Roth IRA, but it does mean that
anyone can convert an existing IRA to a Roth IRA.
As with any new
law or rule strings are attached…
While the income
limitations for Roth conversions are repealed in 2010 and all subsequent
years, 2010 is the only year that will allow taxpayers a special break on
paying conversion taxes.
Another trap that
could take place is the 60-day rollover mistake. Typically the best way to
move a traditional IRA to a Roth IRA is by a trustee-to-trustee transfer – a
direct rollover. However some company plans or IRA custodians don’t offer
this type of transfer and simply write you a check, the account owner and
send you on your way. In such cases, you have 60 days to place these funds
into another qualifying retirement account, including a Roth IRA. If you
miss this deadline these funds become taxable and are no longer eligible for
rollover.
It’s true that there are certain traps you need to avoid when considering a
conversion to a Roth IRA. Consulting with a professional now is very
important as the clock has already started ticking for 2010, the magic year
for conversions. Asset Acceleration Planning, LLC is here to assist you in
your deliberation and will present you with the facts you need to know. Call
us now to speak to a professional for obligation-free advice.
