Should You Stay with your IRA or Convert to a Roth?
From the Spring/Summer 2009 Newsletter
Everybody hates to see the value of their retirement nest-egg decline. Fortunately there is a silver lining even during a down market. You may be able to make this down market work to your advantage by converting either all or a portion of your IRA to a Roth IRA. Here is how it works. If the value of your IRA is down, less income tax will be required to convert it to a Roth IRA. Since earnings in a Roth IRA are tax-free, when the stock market goes up, all appreciation in your Roth IRA will be tax-free. Conversely, if your investment in still in a traditional IRA when the market rallies, any earnings are taxed as ordinary income when withdrawn. Paying tax today on a lesser amount may save you more money in the future.
Who qualifies?
Individuals with adjusted gross incomes of less than $100,000 (married and single taxpayers) are now eligible to convert existing traditional IRAs to Roth IRAs. Income taxes would be due on any amount converted, with the exception of non-deductible contributions made to the traditional IRA. Therefore it is important that you also consider the impact of the income tax when determining the amount to convert. You can convert all or a portion of your traditional IRA in any one year and additional amounts in any future year as long as you qualify based on your modified adjusted gross income for that year. Conversions need to be done by December 31st of that year; not the April 15th IRA contribution deadline.
Individuals with adjusted gross incomes of less than $100,000 (married and single taxpayers) are now eligible to convert existing traditional IRAs to Roth IRAs. Income taxes would be due on any amount converted, with the exception of non-deductible contributions made to the traditional IRA. Therefore it is important that you also consider the impact of the income tax when determining the amount to convert. You can convert all or a portion of your traditional IRA in any one year and additional amounts in any future year as long as you qualify based on your modified adjusted gross income for that year. Conversions need to be done by December 31st of that year; not the April 15th IRA contribution deadline.
If you do not qualify this year based on your income, beginning in 2010 anyone can convert funds from a traditional IRA to a Roth IRA regardless of their income level. Additionally, the income recognized from the conversion in 2010 can be reported evenly across years 2011 and 2012 unless the taxpayer opts to have all income taxable in the year of the conversion.
What does this mean for you?
Starting in 2010, or earlier if you are eligible, you will be able to convert to a Roth IRA and not worry about paying taxes on any future gains in the account. If you are eligible to convert and if the taxes can be paid now without jeopardizing your financial situation, then consideration should be given to converting to a Roth IRA. Taking advantage of the low stock market value can allow you to reap huge tax benefits in the future.
Starting in 2010, or earlier if you are eligible, you will be able to convert to a Roth IRA and not worry about paying taxes on any future gains in the account. If you are eligible to convert and if the taxes can be paid now without jeopardizing your financial situation, then consideration should be given to converting to a Roth IRA. Taking advantage of the low stock market value can allow you to reap huge tax benefits in the future.
Call us to discuss the value this planning opportunity may have for you or for assistance in making a conversion.
Contact Ryan if you have questions or would like additional information regarding this topic.
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