To Roth Or Not To Roth


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Effective January 1, 2010, the Election to convert an IRA to a Roth IRA is easier, but it is not for everyone

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To Roth Or Not To Roth

  1. 1. To Roth Or Not to Roth Brian T. Whitlock CPA, JD, LLM ICPAS – Central Chapter January 19, 2010
  2. 2. Roth IRA Benefits <ul><li>Income tax free growth </li></ul><ul><li>Income tax free distributions after age 59 ½ </li></ul><ul><li>No Required Minimum Distributions for owner </li></ul><ul><li>Beneficiaries of ROTH account can stretch benefits tax free over their lifetimes </li></ul>
  3. 3. Roth IRA Qualified Distribution Restrictions <ul><li>Earnings are taxed or subject to 10% penalty if Withdrawn within 5 years of conversion </li></ul><ul><ul><li>Death is not an exception to 5 year rule </li></ul></ul><ul><li>After 5 th year penalty free withdrawals permitted: </li></ul><ul><ul><li>After age 59 ½ </li></ul></ul><ul><ul><li>Following death or disability </li></ul></ul><ul><ul><li>Unreimbursed medical exp over 7.5% of AGI </li></ul></ul><ul><ul><li>Medical insurance premium after job loss </li></ul></ul><ul><ul><li>Qualified Higher Ed for self, spouse, kids or GC </li></ul></ul><ul><ul><li>1st time homebuyers up to $10,000 lifetime limit </li></ul></ul>
  4. 4. Roth IRA Distribution Ordering Rules <ul><li>Order of Withdrawals </li></ul><ul><li>Annual Contributions first (tax-free) </li></ul><ul><li>Conversion contributions next (tax-free but subject to early withdrawal penalty) </li></ul><ul><li>Earnings on account (tax-free provided five year rule and exceptions apply) </li></ul>
  5. 5. <ul><li>Prior to December 31, 2009, existing IRA could be converted to ROTH only if Modified AGI was below $100,000. </li></ul><ul><li>Beginning January 1, 2010, the $100,000 Modified AGI ceiling will be Permanently Repealed. </li></ul>ROTH IRA Conversion Rule
  6. 6. <ul><li>Election to convert in 2010 . </li></ul><ul><li>No taxable income in 2010, just measure the FMV of the plan assets. </li></ul><ul><li>One Half of FMV is Ordinary income in 2011. </li></ul><ul><li>One Half of FMV is Ordinary income in 2012 </li></ul>How the Election Works
  7. 7. <ul><li>Taxpayer can change election by reconverting back to a regular IRA prior to the extended due date for filing 2010 Form 1040 - October 15, 2011 . </li></ul><ul><li>Why reconvert? </li></ul><ul><ul><li>If income tax rates rise to an untenable level </li></ul></ul><ul><ul><li>If the value of the account falls, reconvert </li></ul></ul><ul><li>Taxpayer can re-elect 30 days after reconversion 2010, just measure the FMV of the plan assets. </li></ul>Reconversion Options
  8. 8. <ul><li>Owner of Regular IRA </li></ul><ul><li>Spousal Roll over IRAs </li></ul><ul><li>Owners of Qualified Plan assets and both Spouse and Non-Spouse beneficiary of Qualified Plans Assets </li></ul>Who Can Convert?
  9. 9. <ul><li>NOT Everyone </li></ul><ul><li>Clients that have significant basis in non-deductible IRAs </li></ul><ul><li>Clients can afford to let the funds grow for more than 10 years </li></ul><ul><li>Elderly Clients with taxable estates that want to leave their accounts to children/grandchildren </li></ul>Who Should Convert?
  10. 10. Elderly Client - Taxable Estate Description Life Time After Death FMV of IRA $ 5,000,000 $ 5,000,000 Other Assets 10,000,000 10,000,000 Life Conversion Tax (1,500,000) 0 Taxable Estate $ 13,500,000 $ 15,000,000 Fed & IL Estate Tax (5,000,000) (5,750,000) Income Tax on IRD (962,500) Net to Heirs 8,500,000 8,287,500 Savings $ 212,500
  11. 11. Do not Convert, if <ul><li>You need the funds short-term </li></ul><ul><li>You are over 65 and you need for retirement </li></ul><ul><li>Charity is named as the beneficiary of your IRA </li></ul><ul><li>You HATE to pay any tax early </li></ul><ul><li>You cannot pay the tax on the conversion from funds outside of the IRA </li></ul><ul><li>You believe you will earn less than 3% and be in a marginally lower (>6%) income tax bracket </li></ul><ul><li>You believe you will be in significantly lower tax brackets in the future (Breakeven is a 11% decline in tax rates). </li></ul>
  12. 12. <ul><li>Multiple IRA Accounts create flexible options: </li></ul><ul><li>Leave taxable IRA to charity </li></ul><ul><li>Convert multiple IRA accounts </li></ul><ul><li>Invest accounts differently </li></ul><ul><li>Reconvert accounts that decrease in value </li></ul>Create Flexibility for Clients
  13. 13. <ul><li>After Retirement but before 70 ½ convert a portion each year to utilize low brackets </li></ul><ul><li>Take advantage of business losses </li></ul><ul><li>Take advantage of NOLs </li></ul><ul><li>Take advantage of Charitable Deduction carryovers </li></ul><ul><li>Offset conversion income with charitable contribution deductions </li></ul>Roth Planning Ideas
  14. 14. <ul><li>WATCH OUT FOR UBIT – </li></ul><ul><ul><li>Unrelated Business Income Tax impacts IRAs and ROTH IRAs </li></ul></ul><ul><ul><li>UBI in Partnerships which hold a trade or business </li></ul></ul><ul><ul><li>UBI in debt financed real estate </li></ul></ul><ul><ul><li>UBI in hedge funds and leveraged investments </li></ul></ul><ul><li>Inherited IRAs and Inherited ROTH IRAs are subject to claims of creditor – use Conduit Trusts </li></ul><ul><li>Regular and Roth IRA are not permitted S Corporation Shareholders </li></ul><ul><ul><li>Taproot v. Commissioner (2009) </li></ul></ul>Traps and Final Warnings
  15. 15. Questions and Comments BK Blog: Twitter @TaxGems
  16. 16. CPAs and Consultants