The advantages of a Roth IRA over a Traditional IRA or 401(k) plan have been well documented. Withdrawals from Roth IRAs (including untaxed earnings) are generally not taxable. Furthermore, unlike other tax deferred arrangements, mandatory distributions upon attaining age 70 ½ are not required from a Roth IRA.
Unfortunately, many people have not been able to take advantage of this tax saving opportunity. If your income exceeds certain levels ($176,000 for joint filers, $10,000 for married filing separately filers and $120,000 for all others) you cannot make a direct contribution to a Roth IRA. You cannot convert a Traditional IRA or 401(k) to a Roth IRA before 2010 if your income exceeds $100,000 or you are married but file separately.
Beginning in 2010 though, you will be able to convert a traditional IRA or in some circumstances your balance in a 401(k) plan to a Roth IRA regardless of your income or filing status. Income tax will be due on the conversion of pre tax contributions and earnings, but for 2010 conversions only, one half of tax will be due on your 2011 return and one half on your 2012 return. Taxable income will be accelerated though to the extent you make distributions from the Roth IRA before 2012.
There are several planning opportunities available in 2009 for those who plan to convert in 2010 or later. As previously mentioned, higher income taxpayers are not eligible to make direct contributions to a Roth IRA. Such taxpayers can make non deductible contributions to a traditional IRA before converting this account to a Roth effectively avoiding the Roth income limitation. Please be advised though that you cannot roll over just after tax contributions. A partial rollover is deemed to be a proportionate amount of pre tax and after tax dollars. All traditional IRAs are considered one for this purpose regardless of which IRA is to be converted.
Another planning opportunity exists for participants in a 401(k) plan. Since 2008, otherwise eligible participants can directly roll 401(k) balances into a Roth IRA if the plan so allows. This opportunity also effectively avoids the Roth income limitation.
If you are planning to convert in 2010, you may also want to consider accelerating 2010 income to 2009 and deferring 2009 tax deductions to 2010 where possible in order to even tax brackets as much as possible.
Unfortunately, many people have not been able to take advantage of this tax saving opportunity. If your income exceeds certain levels ($176,000 for joint filers, $10,000 for married filing separately filers and $120,000 for all others) you cannot make a direct contribution to a Roth IRA. You cannot convert a Traditional IRA or 401(k) to a Roth IRA before 2010 if your income exceeds $100,000 or you are married but file separately.
Beginning in 2010 though, you will be able to convert a traditional IRA or in some circumstances your balance in a 401(k) plan to a Roth IRA regardless of your income or filing status. Income tax will be due on the conversion of pre tax contributions and earnings, but for 2010 conversions only, one half of tax will be due on your 2011 return and one half on your 2012 return. Taxable income will be accelerated though to the extent you make distributions from the Roth IRA before 2012.
There are several planning opportunities available in 2009 for those who plan to convert in 2010 or later. As previously mentioned, higher income taxpayers are not eligible to make direct contributions to a Roth IRA. Such taxpayers can make non deductible contributions to a traditional IRA before converting this account to a Roth effectively avoiding the Roth income limitation. Please be advised though that you cannot roll over just after tax contributions. A partial rollover is deemed to be a proportionate amount of pre tax and after tax dollars. All traditional IRAs are considered one for this purpose regardless of which IRA is to be converted.
Another planning opportunity exists for participants in a 401(k) plan. Since 2008, otherwise eligible participants can directly roll 401(k) balances into a Roth IRA if the plan so allows. This opportunity also effectively avoids the Roth income limitation.
If you are planning to convert in 2010, you may also want to consider accelerating 2010 income to 2009 and deferring 2009 tax deductions to 2010 where possible in order to even tax brackets as much as possible.
Whether a Roth conversion is beneficial depends upon a number of factors such as your post retirement income tax rate, your state income tax rules and the length of time your money will remain in the Roth IRA. While these considerations are complex, within certain time limits you may be able to reverse a Roth conversion. As always, you should consult your CPA, attorney or financial advisor to help you plan for this potential retirement savings opportunity.
No comments:
Post a Comment