Wednesday, September 9, 2009

Thinking about Roth IRA Conversions???

The Federal TIPRA Tax Act has made a significant change in the requirements for traditional IRA holders to convert some or all of their IRA monies into Roth IRA’s.

While traditional IRA’s are fully taxable for FED and State purposes when distributed to the holder, Roth IRA’s are completely free of FED and State taxes. Under prior law, traditional IRA holders with modified incomes (AGI) above $ 100,000 were prohibited from converting into a Roth IRA. For modified AGI of $ 100,000 or below the conversion was allowed, although the tax had to be paid in the year of the conversion. Once converted Roth IRA distributions and earnings on the principal would be free of taxation during the holder’s lifetime, as well as the lifetimes of the beneficiaries ie: wife and then children who would inherit the Roth IRA.

Under TIPRA, the income limit of $ 100,000 has been removed AND the tax due when the conversion takes place in 2010 can be spread over the years 2011 and 2012.

This new tax law has created an opportunity for taxpayers to determine whether the Roth IRA conversion would be appropriate from a tax and cash flow standpoint. To accomplish this, a review of the taxpayer’s traditional IRA size, taxpayer’s age, tax situation, marriage status, expected required minimum distribution (RMD), and whether the taxpayer had children or other secondary beneficiaries.

On the negative side, although the tax due on the 2010 conversion can be spread over the following two years (2011 and 2012), the tax due will come much sooner than the tax due utilizing the RMD of the holder based on distributions according to his age.
For example suppose we have a taxpayer with $ 1.0 million in traditional IRA monies and is 65 years old. If the entire $ 1.0 million was converted in 2010, the tax might be $200,000 in 2011 and $200,000 in 2012, depending upon other sources of income taxation for the taxpayer. Compare this to the alternative of waiting until the taxpayer was age 71 (in 6 more years) and then having to take only about 4% of the $ 1.0 million (or higher if the $ 1.0 million has grown with investment interest over the 6 year period) as a RMD distribution or $ 40,000 or so and pay tax on only that. Subsequently the distribution and tax would grow higher each year as the holder grew older. However, we cannot ignore the cash flow impact of paying all of the taxes upfront in years 2011 and 2012 versus paying taxes over a long stream of years.

On the positive side, the Roth IRA original amount is tax free once converted, as well as all of the growth in investment earnings. Also, while the traditional IRA requires a RMD based on ages starting about 71, the Roth IRA requires no minimum distribution at all based on age or any other factor. When your children finally inherit the Roth IRA and have the ability to take distributions, they will appreciate the fact that none of the money and the investment earnings on that money is subject to taxation. Also tax rates for many are at historically low levels. It is expected that rates will rise in the future to satisfy the large debt that the FEDERAL government and state governments are accumulating. The tax free Roth IRA becomes even more valuable under this scenario.

IRA L. MARKS CPA, CFP has experience in quantifying the differences on an after tax cash flow basis between converting your traditional IRA into a Roth IRA, based on the gathering of many factors and performing a cash flow analysis over many years. It makes great sense to have this analysis done as soon as possible to make sure you are able to make the appropriate decision as year 2010 approaches.

Please call or email for an appointment to discuss this issue and all the factors in your own personal tax situation.

September 2009 Accounting Newsletter

1. SEPT, PODCAST: REASSESSING INVESTMENT STRATEGY
If the performance of your investments over the past year
has you ready to put what's left under a mattress, think
again. Hear from a member of the New Jersey Society of CPAs
about why you don't have to throw in the towel and how a
financial adviser can help navigate the market's volatility.
http://www.moneymattersnj.com/story.cfm?SID=14143

SEE ALSO:
Hatching a Plan to Protect Your Nest Egg in Today’s Rough Economy
http://www.moneymattersnj.com/story.cfm?sid=14058

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2. N.J. SENIOR FREEZE, HOMESTEAD REBATE FILING DEADLINES EXTENDED
The deadline for filing 2008 "Senior Freeze" (Property Tax
Reimbursement Program) and Homestead Rebate applications
with the state of New Jersey has been extended until
November 2, 2009.
http://www.moneymattersnj.com/story.cfm?sid=14151

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3. EIGHT IMPORTANT QUESTIONS FOR HOBBYISTS
Hobbies – such as woodworking, stamp collecting and
scrapbooking – are often done for pleasure, but can result
in a profit. If your favorite activity does make a profit
every year or so, there may be tax implications.
http://www.moneymattersnj.com/story.cfm?sid=14158

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4. CUT COSTS WITH INFORMAL WEDDINGS
Many couples today are seeking ways to cut costs when it
comes to their weddings. One subtle way to cut costs without
having to sacrifice elegance is to have an informal wedding.
http://www.moneymattersnj.com/story.cfm?SID=14140

SEE ALSO:
The Newlyweds’ Guide to Life Insurance
http://www.cpai.com/personal-insurance/insurance

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5. ADDITIONAL HEADLINES

* Fifteen 5-Minute Tasks to Improve Your Finances -
http://www.fiscalfizzle.com/2009/08/five-minute-money-tasks/

* The Best Places to Store Your Cash -
http://www.smartmoney.com/investing/

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