First, let me clarify one important point because bloggers, media experts, & financial advisors often times use the term "Conversion Tax" when describing the income taxes that are created when converting to Roth IRA. No, its not an extra tax, there is no extra tax. It's simply the tax that you owe. Remember the money in the traditional IRA has not yet been taxed. Therefore, if you convert to a ROTH you simply take the portion of the traditional IRA
that has not yet been taxed and include it as taxable income in the year of conversion. (You
do not include the portion of any non-deductible contributions that may have been made to a
traditional IRA.)
Lets say you have $95,000 of taxable income from regular income sources and you convert a $50,000 traditional IRA to a Roth in 2009 then, in effect, the total taxable income that year would be $155,000. If you convert in 2010, half of the $50,000 will be added to your taxable income and the other half will be added to your 2011 taxable income. This only applies if you convert in 2010.
My advice is to seek the guidance of a knowledgeable advisor who is going to do the math for you to really determine whether it makes sense for you to convert or not. Please note you don't have to convert all your traditional IRA to ROTH. You can do it in staggered basis or you can
convert just a portion of it. That way, you have money that is taxable, money that is tax free and money in a tax advantaged account.
Ask Arlene
Welcome to Arlene Brown's
Roth IRA Conversion
Educational Blog
Saturday, October 17, 2009
Thursday, September 3, 2009
Opportunities of Roth
As a Financial Adviser, I see the Roth IRA as an opportunity to establish tax-free income for clients while passing the remainder of their Roth account to their beneficiaries at death. Come to think of it "RETIRE without TAXES" makes the conversion attractive. Having said that, the decision must be carefully analyzed. You can start by running some numbers on some of the online calculators. I suggest using the Motley Fool conversion calculator here. However, the subject of conversion is more than just numbers. It's so personal that you must take a hard look at your entire situation. You have to weigh the tax pros and cons and understand that there may be other non-tax and or non-financial reasons to convert or not to convert.
A Few pointers, consider conversion if:
- You won't tap into the Roth IRA within five years and expect to be in a higher tax bracket in the future. Paying the taxes now while you're in a lower tax bracket will save you income taxes later.
- If you want to build an estate for heirs, this could be a great way to minimize the overall income tax burden to your family. Heirs would get the proceeds free of income taxes and in the interim the proceeds could continue growing free of taxes.
- If you have extra funds to pay the income taxes due on the conversion without tapping into the traditional IRA money.
- If you don't anticipate needing the IRA money to live on, and you wish to avoid the annual mandatory distributions required from a traditional IRA when you reach age 70½. Paying the taxes now will allow the money to grow tax-deferred through the years ultimately to be received by heirs tax-free later.
As you can see from this discussion, there's no easy answer to the Roth IRA conversion question. Examine this issue using your own set of circumstances to determine the pros and cons as they pertain to your particular situation. That's the only way you can make the decision that's best for you and for your family. Given that the tax year is fast coming to a close, now is the time to act. Seek help from a Roth Conversion Specialist or IRA Specialist.
Ask Arlene
Welcome to Arlene Brown's
Roth IRA Conversion
Educational Blog
Tuesday, August 25, 2009
Consider ROTH
As 2009 is quickly passing, we may wish to seriously consider converting Traditional IRA to a Roth IRA. You may want to convert a part of it before December 31st. Then convert
the remaining in 2010. Here's why:
Number one - Due to economic crisis, Congress has passed H.R. 7327, the "Worker, Retiree, and Employer Recovery Act of 2008." This new law allows an account holder avoid what would otherwise be a Required Minimum Distribution (called "RMDs") in 2009. So, why not convert the amount you should have taken as RMD it to ROTH. Hey, you are already used to paying taxes on that amount. Ask your Financial Adviser to do the Math for you. This might make good sense.
Number two - If you are in a high tax bracket now and you think your tax rate will go up tomorrow, converting to a Roth may make sense. Taxes are expected to rise in the next few years, so even if you expect your income to remain the same at retirement you're still better off converting now.
Number three- Do you want to leave a loving legacy to your beneficiary by passing along a non taxable asset? Though, your beneficiaries may have to pay estate taxes on the value of the ROTH IRA, no part of the ROTH IRA will be subject to income tax.
Starting in 2010, the income limit (MAGI- Modified Adjusted Gross Income) on Roth conversion will dissappear thus, providing a backdoor way for IRA account holders to convert to ROTH. Moreover, account holders who convert in 2010 will be allowed to pay part of the tax bill in 2011 and the remaining in 2012.
Ask Arlene
Welcome to Arlene Brown's
Roth IRA Conversion
Educational Blog
the remaining in 2010. Here's why:
Number one - Due to economic crisis, Congress has passed H.R. 7327, the "Worker, Retiree, and Employer Recovery Act of 2008." This new law allows an account holder avoid what would otherwise be a Required Minimum Distribution (called "RMDs") in 2009. So, why not convert the amount you should have taken as RMD it to ROTH. Hey, you are already used to paying taxes on that amount. Ask your Financial Adviser to do the Math for you. This might make good sense.
Number two - If you are in a high tax bracket now and you think your tax rate will go up tomorrow, converting to a Roth may make sense. Taxes are expected to rise in the next few years, so even if you expect your income to remain the same at retirement you're still better off converting now.
Number three- Do you want to leave a loving legacy to your beneficiary by passing along a non taxable asset? Though, your beneficiaries may have to pay estate taxes on the value of the ROTH IRA, no part of the ROTH IRA will be subject to income tax.
Starting in 2010, the income limit (MAGI- Modified Adjusted Gross Income) on Roth conversion will dissappear thus, providing a backdoor way for IRA account holders to convert to ROTH. Moreover, account holders who convert in 2010 will be allowed to pay part of the tax bill in 2011 and the remaining in 2012.
Ask Arlene
Welcome to Arlene Brown's
Roth IRA Conversion
Educational Blog
Friday, July 31, 2009
What is a Roth IRA ?
A Roth IRA is an Individual Retirement Account. It came into being when it was sponsored by Senator William Roth, and became a law as part of the Tax Relief Act of 1997.
With the introduction of Roth, there are now two types of savings vehicles that are called IRA. The traditional is still referred to as an IRA; the recent plan is referred to as a Roth IRA. While contributions to a Traditional IRA are made with pre tax dollars and earnings to be tax deferred until retirement. With Roth IRAs, contributions are made on an after-tax basis, but earnings are not taxed and qualifying distributions are tax free.
With the introduction of Roth, there are now two types of savings vehicles that are called IRA. The traditional is still referred to as an IRA; the recent plan is referred to as a Roth IRA. While contributions to a Traditional IRA are made with pre tax dollars and earnings to be tax deferred until retirement. With Roth IRAs, contributions are made on an after-tax basis, but earnings are not taxed and qualifying distributions are tax free.
Monday, June 29, 2009
Are Taxes Going Up
Saturday, February 7, 2009
CBS 60 MINUTES: ARE TAX RATES GOING UP?
Anyone who thinks their tax rates will be higher in the future should consider converting to a Roth IRA.
Anyone who thinks they won't should watch this this 60 MINUTES segment that aired March 4, 2007From CBSnews.com:As correspondent Steve Kroft first reported earlier this year, he is the nation's top accountant, the comptroller general of the United States. He's totaled up our government's income, liabilities, and future obligations and concluded that our current standard of living is unsustainable unless some drastic action is taken. And he's not alone. It's been called the "dirty little secret everyone in Washington knows" – a set of financial truths so inconvenient that most elected officials don't even want to talk about them, which is exactly why David Walker does.Click this link to go CBSnews.com where you can watch this 60 MINUTES segment
http://www.cbsnews.com/stories/2007/03/01/60minutes/main2528226.shtml
Read more...
CBS 60 MINUTES: ARE TAX RATES GOING UP?
Anyone who thinks their tax rates will be higher in the future should consider converting to a Roth IRA.
Anyone who thinks they won't should watch this this 60 MINUTES segment that aired March 4, 2007From CBSnews.com:As correspondent Steve Kroft first reported earlier this year, he is the nation's top accountant, the comptroller general of the United States. He's totaled up our government's income, liabilities, and future obligations and concluded that our current standard of living is unsustainable unless some drastic action is taken. And he's not alone. It's been called the "dirty little secret everyone in Washington knows" – a set of financial truths so inconvenient that most elected officials don't even want to talk about them, which is exactly why David Walker does.Click this link to go CBSnews.com where you can watch this 60 MINUTES segment
http://www.cbsnews.com/stories/2007/03/01/60minutes/main2528226.shtml
Read more...
Retire Without Taxes
Friday, February 13, 2009
COVER STORY
RETIRE WITHOUT TAXES
Suppose you could earn tax-free returns on your retirement savings. Suppose you could collect tax-free income after you quit working — and even pass along these tax-free payouts to your heirs. You'd jump at that trifecta, right? Then why haven't you? With a Roth IRA and its workplace counterpart, the Roth 401(k), you can get all three valuable benefits in one investment. But what's holding you back could be confusion. Roths present you with a minefield of eligibility requirements, tricky tax twists and arcane withdrawal rules. That's where MONEY's guide comes in. Their 12 questions and answers will tell you everything you need to know to make a Roth the cornerstone of a rich, secure retirement.
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