The Feds Crack Down on IRA Errors - Aaron Skloff, AIF, CFA, MBA - CEO Skloff Financial Group
July 7, 2012 – FAMILY VALUE – By Kelly Greene The Feds Crack Down on IRA Errors, Part IIIndividual retirement accounts are often a source of confusion for families. Even so, we were surprised by the sheervolume of reader questions prompted by our article last month on how the Internal Revenue Service is turning its attentionto IRA snafus, particularly mistakes made by people taking required withdrawals and making "excess" contributions.I heard about a loophole for people who exceed the income limit to contribute to a Roth IRA: Contribute to aregular IRA, and then convert it to a Roth. Is that too good to be true?A Roth IRA allows people to make after-tax contributions—and most withdrawals are tax-free, a major advantage if taxrates rise in the coming years.But the highest earners cant contribute to Roths. The income limit for making any Roth IRA contribution in 2012 is$183,000 for married couples filing joint tax returns and $125,000 for individuals.The good news is that the federal government in 2010 dropped the income limit for transferring savings to a Roth IRAfrom a traditional IRA.So, yes, even if your income disqualifies you from making a contribution to a Roth IRA, you can make a contribution to atraditional IRA and then move those assets to a Roth in what is called a "conversion."Comments July 7, 2012Be careful when making a conversion of a traditional IRA to a Roth IRA. None, some, or all of the conversion may betaxable as income. To determine which category you fall into check Form 8606 – you may have filed it with your federaltax return. It provides the post tax cost basis of contributions you made to your traditional IRA(s), which can reduce oreliminate taxes on your conversion. The useful information on Form 8606 could prevent you from being taxed twice.Importantly, you cannot avoid being taxed on your conversion if the cumulative value of all your traditional IRAs isgreater than the cost basis of all your IRAs. Work closely with your Financial Adviser when evaluating a conversion.Aaron Skloff, AIF, CFA, MBACEO - Skloff Financial GroupAaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of BusinessAdministration (MBA), is the Chief Executive Officer of Skloff Financial Group, a NJ based Registered InvestmentAdvisory firm. The firm specializes in financial planning and investment management services for high net worthindividuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.