Roth IRA Conversion Webinar

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Roth IRA Conversion Webinar

  1. 1. Roth IRA Conversion Webinar Thomas A. Seifert, CPA/PFS & Peter P. DeVito, CPA, CFP® October/November 2010
  2. 2. Thomas A. Seifert, CPA/PFS Partner & Senior Advisor Peter P. DeVito, CPA, CFP® Vice President & Senior Advisor
  3. 3. Traditional IRA • Investors make tax deductible contributions • Enjoy tax-deferred growth • Pay tax at ordinary income rates on future withdrawals • Mandatory distributions begin at age 70 ½
  4. 4. Roth IRA • Investors pay taxes on contributions & conversions • Enjoy tax-free growth • Tax-free distributions at retirement • No mandatory distributions for original owner
  5. 5. Who is Eligible to Convert? Anyone with a current IRA, rollover or former qualified employer sponsored qualified plan: • 401(k) plan • 403(b) plan • 457(b) plan • Simple IRA • SEP IRA * Excludes 457(f) non-qualified deferred compensation plans
  6. 6. 2010 Conversion Opportunity • Prior to 1/1/2010, you could not convert to a Roth IRA if your Modified Adjusted Gross Income (MAGI) was greater than $100,000 • Effective 1/1/2010 and beyond the MAGI limit disappears and you are able to convert as much or as little to a Roth IRA as you like • If you convert to a Roth in 2010, you have the extra option of paying your tax bill over two years, 2011 and 2012
  7. 7. Who Might Benefit From Converting? • Expect future tax rates to stay the same or increase • Long time horizon expectancy • Excess cash available in other taxable accounts • Estate planning vehicle for your heirs
  8. 8. Advantages of Converting • Ability to undo or re-characterize the conversion if IRA account value decreases • Partial and multiple conversions allowed • Any prior non-deductible IRA contributions are not taxed on the conversion
  9. 9. Disadvantages of Converting • Money outside your IRA most likely will be needed to pay the tax due • Distributions are not immediately tax-free: (a) Roth IRA must be established for 5 years –and – (b) Obtain age 59 ½
  10. 10. Estate Planning Benefits • Beneficiaries can inherit the account income tax- free • Withdrawals over beneficiary’s life expectancy also not subject to taxes • Income tax paid on conversion reduces owner’s estate
  11. 11. Roth Conversion Key Factors • How old is the investor? • What is the investor’s current income tax rate? • How much of the IRA does the investor intend to spend? • How much wealth is held in taxable vs. tax deferred accounts? • Will the designated beneficiary take only RMDs?
  12. 12. Roth Conversion –vs– Non Conversion Example Assumptions • Joe, age 50, has a $200k IRA and $70k investment account • Joe converts to Roth IRA & pays 35% tax rate • IRA grows at 8% & investment act grows at 6% • Tax rate is same now and at retirement • Joe does not take any cash withdrawals • RMD’s are taken out at beginning of year • Joe’s beneficiary, age 10, inherits both accounts at age 50, upon Joe’s death
  13. 13. Roth IRA Conversion -vs- Traditional IRA 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 6 11 16 21 26 31 36 41 46 51 56 Millions Roth IRA Conversion Traditional IRA
  14. 14. Fairport Advantage • A Roth IRA conversion is a complicated decision with various financial and tax implications • Each situation needs to be evaluated on a case by case basis • Take a close look at your own situation and contact a Fairport advisor to discuss whether converting to a Roth IRA makes sense for you
  15. 15. Disclosures • Thomas A. Seifert, CPA/PFS and Peter P. DeVito, CPA, CFP® are advisors with Fairport Asset Management of Cleveland, Ohio. Fairport provides wealth management services to the high net worth community, with investment management as our core expertise. • This Roth IRA Conversion webinar is for informational purposes only and should not be relied upon as financial planning/tax advice. There are inherent limitations of showing hypothetical examples. • When considering a Roth IRA conversion, factors such as current and future tax brackets and income levels should be part of any equation, as well as how the investor will pay income taxes due at conversion and how long the Roth IRA will remain untouched.
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