Rare Tax Break Puts Roth IRAs at Center Stage

Dec. 17, 2009 - PRLog -- Minneapolis, MN –  www.howardrichards.net - Roth IRA accounts have many benefits, however in the past , income caps and tight regulations on converting existing traditional IRA’s to a Roth have prevented consumers from considering them as a component of their investment strategy

In 2006, enactment of the Tax Increase Prevention and Reconciliation Act presented a unique opportunity beginning in 2010 that will benefit many consumers previously not able to take advantage of Roth IRA Accounts.  

Roth IRA’s, similar to traditional IRA’s, can be funded subject to prevailing IRA contribution limits, and after tax dollars are deposited with no immediate tax benefit. Unlike traditional IRA’s however, the Roth is not subject to tax when qualifying withdrawals are made, and withdrawals are never taxed to the owner or to subsequent beneficiaries. Additionally, required minimum distributions do not apply to the original owner, so funds can be left to accumulate tax free without concern for the timing issues of traditional IRA’s.  

Traditionally, non-deductible periodic funding of Roth accounts takes considerable time to accumulate meaningful sums. The real power of the product lies in the ability to do conversions of traditional IRA accounts to Roth accounts. To the end of 2009, single or married filing jointly taxpayers whose Modified Adjusted Gross Income is over $100,000 are ineligible to convert. However, Starting January 1, 2010 we get a rare break! The MAGI test is permanently repealed, opening the floodgates of potential conversions of existing traditional IRA’s.

Who might consider taking advantage of this tax break?  
If tax rates will be going up during your lifetime as well as the lifetime of beneficiaries, it probably makes sense. Especially for younger taxpayers, where the unquestioned benefit of years of tax free compounding combines with tax free withdrawals, it’s a no brainer.
Additionally, if converting a traditional IRA to a Roth IRA in 2010, the amount of the conversion will not be counted as taxable income until 2011, payable with your 2011 return in April, 2012.

Other options which allow one to take advantage of this great offer include electing to split the tax between the 2011 and 2012 tax years, effectively postponing the final payment until April, 2013.


To get the most of out of a Roth IRA keep these tips in mind:
1.)   The ability to reverse, or recharacterize, the conversion is a discussion beyond the scope of this summary article. However, since a subsequent decline in the value of a converted Roth is the primary driver for recharacterization, it makes sense when converting, to split up the Roth conversion into several separate Roth accounts representing different asset classes.

For example, the equity portion declines and the bond portion rises which allows for recharacterizion of only the equity-oriented Roth. This will maintain the benefits of the conversion on the other piece. Also, for those without a current Roth IRA, be aware that even if you are over 591/2, a five year test for tax free withdrawals of earnings must be met.

2.)   Know your tax bracket, for example, married filing jointly taxpayers do not exit the 15 percent marginal federal tax bracket until their taxable income exceeds $67,500. If taxable income is under that amount, but the thought of paying 25 percent marginal tax on at least a portion of the conversion sounds dreadful, consider a partial conversion to bring income up to the threshold. Controlling tax bills in retirement will be the reward for such well informed, strategic behavior.

To learn more about Roth IRAs and how to take advantage of this rare tax break, please contact Howard D. Richards, CFP®, or visit our website at www.howardrichards.net.

About Howard D. Richards, CFP - www.howardrichards.net -Howard D. Richards is a Certified Financial Planner™ Professional, CFP® based in Plymouth Minnesota, specializing in Retirement & Estate Planning services & Investment Strategies tailored to risk tolerance, needs and values.  Experience a new approach to financial planning, based solely on trust, knowledge and personal service, including dedication to developing lasting relationships with all clients.

Committed to maintaining the highest standards of integrity and professionalism, we endeavor to know and understand every aspect of your financial situation and provide you with only the highest quality information, services, and solutions to help you reach your goals. Contact us today to find out how strategic wealth management can enhance your financial future. Your Life, Your Way, Your Trusted Advisor. Contact us at 763-231-7881, or via e mail at hdr@securuswealth.com .
Securus Wealth Management, LLC
Plymouth – Minneapolis – Crosslake – Grand Rapids – Fargo

Investment Advisory Services offered through Securus Wealth Management LLC, a Registered Investment Advisor.  Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC.  Securus and Cambridge are separate companies. Cambridge does not offer legal or tax advice.

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About Howard D. Richards, CFP - www.howardrichards.net -Howard D. Richards is a Certified Financial Planner™ Professional, CFP® based in Plymouth Minnesota, specializing in Retirement & Estate Planning services & Investment Strategies tailored to risk tolerance, needs and values. Experience a new approach to financial planning, based solely on trust, knowledge and personal service, including dedication to developing lasting relationships with all clients.
Committed to maintaining the highest standards of integrity and professionalism, we endeavor to know and understand every aspect of your financial situation and provide you with only the highest quality information, services, and solutions to help you reach your goals. Contact us today to find out how strategic wealth management can enhance your financial future. Your Life, Your Way, Your Trusted Advisor. Contact us at 763-231-7881, or via e mail at hdr@securuswealth.com .