Roth Conversions


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Should you convert to a Roth? This presentation outlines the issues you face when making this important decision.

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Roth Conversions

  1. 1. Roth Conversions<br />Peri Ann Aptaker, Esq., CPA/PFS, CFP®, CBA<br /><br />
  2. 2. Roth IRA’s came into the law in 1997<br />Under current law, single taxpayers with MAGI in excess of $116,000 and married taxpayers filing jointly with MAGI in excess of $169,000 cannot make contributions to Roth’s.<br />Individuals and MFJ’s with MAGI in excess of $100,000 currently cannot convert traditional IRA’s to a Roth. MFS cannot convert at all.<br />Historical Perspective<br />
  3. 3. Effective 1/1/10 all taxpayers are allowed to convert their traditional IRA’s to Roth IRA’s, regardless of income or filing status.<br />Contrary to traditional tax wisdom – paying the tax today may be more beneficial to the client.<br />Can result in an increase in overall retirement assets available.<br />Can result in larger inheritance to beneficiaries.<br />Can provide a tax-free source of income.<br />2010 Opportunity<br />
  4. 4. Ordinary income is recognized on conversion.<br />Some traditional IRA’s may have basis – check for Form 8606.<br />If convert in 2010 – conversion income automatically deferred equally over 2011 and 2012. Tax rates in effect in those years will apply.<br />Can elect to opt out of this treatment and pay tax hit in 2010. May be advantageous if taxpayer believes rates will increase in 2011 and 2012.<br />Conversions in 2010 and Beyond<br />
  5. 5. Taxpayer’s current and estimated marginal Federal and state rates<br />Basis in Traditional IRA’s, charitable contribution carryovers, and other tax attributes that will affect the ultimate tax paid on conversion<br />Estimated Federal and state Estate tax liability<br />Current and future cash flow needs<br />Estate planning goals<br />Life expectancy and current health of IRA owner<br />Conversion Factors<br />
  6. 6. Anticipated rates of return on all assets (both IRA and non-IRA assets)<br />Income needs during retirement years – more or less than traditional RMD’s<br />Life expectancy of the beneficiaries<br />State law for liability protection<br />Taxpayer’s belief on where Congress will go with income, estate, and gift tax legislation.<br />Conversion Factors<br />
  7. 7. Three Stages of Analysis<br />
  8. 8. Distributions are not required from traditional or Roth IRA’s<br />Accumulation of wealth is equal during this phase in retirement accounts<br />Non-IRA money likely source of conversion tax<br />Need sufficient NON-IRA money to cover tax and living expenses<br />Stage 1- Conversion to 70 ½<br />
  9. 9. No distributions are required from Roth IRA’s<br />Distributions are mandatory from traditional IRA’s<br />Benefits of conversion begin to reverse disadvantage of paying conversion tax in Stage 1<br />Assumes do not need IRA money during this period, or need less than RMD’s for traditional IRA’s.<br />Stage 2 – 70 ½ to Death of Participant<br />
  10. 10. Beneficiary must make RMD’s during his/her lifetime on both inherited traditional and Roth IRA’s.<br />Income tax is due on traditional RMD’s.<br />NO income tax is due on Roth RMD’s.<br />More money available to beneficiary due to absence of income tax on Roth RMD’s.<br />Stage 3 – Death of Participant to Death of Beneficiary<br />
  11. 11. When is it Beneficial to Convert?<br />
  12. 12. All IRA’s must be aggregated for basis allocation<br />Pro-rata share of basis in the aggregate amount of the IRA’s must be allocated to amount converted<br />Prevents taxpayer’s from “picking and choosing” IRA’s with basis for conversion<br />Partial conversions can be done<br />Traditional IRA’s with Basis<br />
  13. 13. Roth contributions are distributed first, tax-free<br />Conversion contributions are distributed next, tax-free <br />Earnings are distributed last, tax-free (subject to qualified distribution and excise tax requirements and holding periods).<br />Order of Roth Distributions<br />
  14. 14. Income tax deferred if Roth has been held for 5 years <br />Requirement to hold converted Roth for full 5 years to be excluded from excise tax (10%)<br />Exceptions for 10% excise tax applies<br />5 Year Holding Period<br />
  15. 15. Special “re-characterization rule” allows the IRA owner to take a second look or change their mind on the decision to convert before the taxpayer files his or her return (includes extensions).<br />Rule allows IRA to be “re-characterized” as a traditional IRA.<br />May be warranted if stock market plunges after conversion.<br />Use a new Roth IRA account to permit re-characterization<br />Must wait until later of next tax year or 30 days before conversion permitted again<br />Unwinding a Conversion<br />
  16. 16. Use same custodian or trustee to trustee transfer – do not take funds personally<br />Avoid 60 day rollover rules this way<br />Make sure beneficiary designations allow for “stretch” benefits<br />Tactics<br />
  17. 17. Date of birth of participant; spouse; beneficiaries<br />Amount of retirement assets<br />Amount of non-retirement assets<br />Amount of other estate assets<br />Health of participant and spouse – life expectancy<br />Expected growth rate of investments<br />Amount of retirement income needed<br />Estimated tax rates today and in the future<br />Charitable intent<br />State law – creditor protection rules<br />Information Needed for Analysis<br />
  18. 18. Peri Ann Aptaker, Esq., CPA/PFS, CFP®, CBA<br />Managing Director<br />KLR Wealth Management, LLC<br />951 North Main Street<br />Providence, RI 02904<br />401-274-2001<br /><br />