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Roth Ira Conversions 2010

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New rules regarding converting a Traditional IRA to a Roth IRA. Who may convert and is it right for you?

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Roth Ira Conversions 2010

  1. 1. Roth IRA Conversions 2010<br />New Opportunities for 2010<br />
  2. 2. Introduction to Roth IRAs<br />Contributions are made on an after-tax basis<br />There’s no up-front tax benefit<br />Qualified distributions are entirely free from federal income tax<br />New rules for 2010<br />Caution: Different rules may apply for state tax purposes<br />
  3. 3. Traditional IRA vs. Roth IRA<br />Traditional IRA<br />Roth IRA<br />Can make annual contribution if age 70½ and have compensation<br />Deductible contributions depend on income, filing status, and coverage by retirement plan<br />Can make after-tax (nondeductible) contributions<br />Distributions subject to federal income tax, except for after-tax contributions <br />Distributions prior to age 59½ may be subject to additional 10% penalty tax<br />Distributions required after 70½<br />Funds grow tax deferred<br /><ul><li>Can make annual contribution if have compensation; no age limit
  4. 4. Ability to contribute depends on income level and filing status
  5. 5. All contributions are after-tax (no up-front deduction)
  6. 6. Qualified distributions are entirely free from federal income taxes
  7. 7. For nonqualified distributions, earnings subject to federal income tax and 10% penalty tax may apply if under age 59½
  8. 8. No lifetime required distributions
  9. 9. Funds grow tax deferred/tax-free</li></li></ul><li>Roth Tax-Free Qualified Distributions<br />Qualified distributions are federal income tax free. <br />For a distribution to be qualified, it must meet BOTH of the following<br />requirements:<br />Satisfy five-year holding period<br /> AND<br />Have qualifying event<br />Age 59½ <br />Disability<br />First-time homebuyer expenses (limited to $10,000 lifetime from all IRAs)<br />Death<br />
  10. 10. Roth Qualified Distributions: The Five-Year Holding Period<br />Five-year holding period begins on the first day of the tax year for which you first establish ANY Roth IRA<br />Five-year holding period ends after five calendar years<br />Applies to your beneficiaries after your death as well <br />Spouse beneficiary can roll over to own Roth IRA or treat your Roth IRA as his or her own. In either case, the five-year holding period begins on the earlier of:<br />January 1 of tax year your spouse first established any Roth IRA, or<br />January 1 of tax year you first established any Roth IRA<br />Period begins on January 1 of first taxyear<br /><ul><li>Can contribute to IRA for a tax year until April 15 of following year
  11. 11. If contribute to first Roth IRA on April 15, 2011, and designate contribution for 2010, five-year holding period begins on January 1, 2010</li></li></ul><li>Qualified Distributions - Example 1<br />Age 60<br />Establish first Roth IRA on December 31, 2010, by converting a traditional IRA to a Roth IRA<br />Must have qualifying event AND satisfy five-year holding period<br />Here qualifying event has occurred--you’ve attained age 59½ <br />Five-year holding period begins January 1, 2010<br />Five-year holding period ends December 31, 2014<br />Tax-free qualified withdrawals from this Roth IRA, and any other Roth IRA you own, available anytime after December 31, 2014<br />Est first Roth <br />IRA 12/31/10<br />5-year period<br />starts 1/1/10<br />5 -year period <br />ends 12/31/14<br />Qual event<br />59 ½ <br />Tax-free dist<br />after 12/31/14<br />
  12. 12. Qualified Distributions - Example 2<br />Age 35<br />Establish first Roth IRA on June 1, 2010, by making a rollover from a 401(k) plan to the Roth IRA<br />Must have qualifying event AND satisfy five-year holding period<br />Five-year holding period begins January 1, 2010<br />Five-year holding period ends December 31, 2014<br />Tax-free qualified withdrawals available from this Roth IRA, and any other Roth IRA you own:<br />In 2034, after you attain age 59½<br />After December 31, 2014, if you become disabled or die*<br />After December 31, 2014, if you have first-time homebuyer expenses (up to $10,000 lifetime from all IRAs)*<br />Qual event<br />59 ½ in 2034 <br />5-year period<br />starts 1/1/10<br />5 year ends<br />12/31/14<br />Est first Roth <br />IRA 6/31/10<br />Tax-free dist<br />*Tax-free dist<br />after 12/31/14<br />
  13. 13. Qualified Distributions - Example 3<br />You inherit a Roth IRA from your mother in 2010<br />Your mother established her first Roth IRA in 2007 by making a regular annual contribution<br />Must have qualifying event AND satisfy five-year holding period<br />Qualifying event is your mother’s death<br />Five-year holding period begins January 1, 2007<br />Five-year holding period ends December 31, 2011<br />Tax-free qualified withdrawals are available from the inherited Roth IRA anytime after December 31, 2011<br />Qual. event<br />in 2010<br />mother’s death <br />5-year period<br />starts 1/1/07<br />5-year period<br />ends 12/31/11<br />Tax-free dist<br />after 12/31/11<br />Mother <br />est. first Roth <br />IRA in 2007<br />
  14. 14. Nonqualified Roth Distributions<br />Nonqualified distribution: You haven’t satisfied the five-year holding period or you don’t have a qualifying event<br /><ul><li>Your contributions come out tax-free
  15. 15. Your contributions come out first
  16. 16. Taxable earnings come out last
  17. 17. Earnings are subject to income tax, and 10% penalty tax unless exception applies</li></li></ul><li>Ways to Fund a Roth IRA<br />
  18. 18. Converting a Traditional IRA to a Roth IRA<br />Taxed at conversion as if you took a withdrawal (but 10% early distribution does not apply)<br />Trade off immediate taxation for possibility of tax-free qualified distributions in future<br />You can also convert SIMPLE IRAs (after two-year waiting period) and SEP IRAs to Roth IRAs<br />
  19. 19. Ways to Convert a Traditional IRA to a Roth IRA<br />Rollover<br />Trustee-to-trustee transfer<br />Same-trustee transfer<br />
  20. 20. Calculating the Conversion Taxes<br />Taxed as if you took a withdrawal from the traditional IRA<br />10% penalty tax doesn’t apply (but may be recaptured if you make a nonqualified withdrawal from your Roth IRA within five years of any conversion)<br />
  21. 21. Calculating the Conversion Taxes<br />Only deductible contributions and earnings<br />If you’ve made only deductible contributions to your<br />traditional IRAs, then the entire amount you convert is <br />subject to income tax.<br />IRA<br />=<br />Fully taxable conversion<br />
  22. 22. Calculating the Conversion Taxes<br />TAXABLE<br />Deductible contributions and earnings<br />NONTAXABLE<br />Non-deductible contributions<br />If you’ve made nondeductible (after-tax) contributions to your traditional IRA, any distribution consists of pro-rata amount of taxable and nontaxable dollars<br />Can’t just convert nontaxable dollars in a traditional IRA for tax-free conversion<br />IRA<br />
  23. 23. Calculating the Conversion Taxes<br />IRA #1<br />TAXABLE<br />Deductible contributions and earnings<br />TAXABLE<br />Deductible contributions and earnings<br />TAXABLE<br />Deductible contributions and earnings<br /> IRA #2<br />NONTAXABLE<br />Non-deductible contributions<br />NONTAXABLE<br />Non-deductible contributions<br />NONTAXABLE<br />Non-deductible contributions<br />IRA<br />IRA<br />Must aggregate all traditional IRAs you own, including SEP and SIMPLE IRAs, when calculating the taxable amount of a withdrawal or conversion<br />
  24. 24. Calculating the Conversion Taxes<br />Deductible contributions and earnings<br />Non-deductible contributions<br />$100,000<br />$20,000<br />Traditional <br />IRA #1<br />Traditional<br />IRA #2<br /><ul><li>If you convert IRA #2 to a Roth you’ll have $16,666 of taxable income
  25. 25. First aggregate all traditional IRAs = $120,000 total balance
  26. 26. Then determine taxable percentage = 83⅓% ($100,000/$120,000)
  27. 27. Then calculate taxable portion of IRA conversion = $16,666 ($20,000 x 83⅓%)</li></li></ul><li>Who Can Convert to a Roth?<br />
  28. 28. Special Deferral Rule for 2010<br />Special rule applies only to conversions in 2010<br />Can report half of the conversion income on your 2011 federal income tax return, and the other half on your 2012 tax return<br />Or can report all of the income in 2010<br />
  29. 29. Special Deferral Rule for 2010<br />Deductible contributions and earnings<br />2011 Tax Return<br />$125,000<br />IRA<br />2010 Tax<br />Return<br />$250,000<br />$250,000<br />=<br />OR<br />2012 Tax<br />Return<br />$125,000<br /><ul><li>If you convert the entire traditional IRA to a Roth, you’ll have $250,000 of taxable income
  30. 30. Can report $125,000 on 2011 return, and $125,000 on 2012 return
  31. 31. Or can report $250,000 on 2010 tax return</li></li></ul><li>Should You Use the Special 2010 Deferral Rule?<br />Decision depends on your anticipated tax rates for 2010, 2011, and 2012<br />Tax rates are scheduled to revert to pre-2001 levels in 2011<br />Highest marginal rate in 2011 will be 39.6% compared to 35% in 2010<br />2010 Tax<br />Return<br />100%<br />?<br />OR<br />2012 Tax<br />Return<br />50%<br />2011 Tax<br />Return<br />50%<br />
  32. 32. Converting Employer Plan Dollars to a Roth IRA<br />Eligible distributions from 401(k), 403(b), 457(b), and qualified plans can be rolled over to traditional or Roth IRA<br />Your employer will identify an eligible rollover distribution<br />Amounts rolled over to a Roth IRA are taxed except for any after-tax contributions<br />Rollovers to a Roth IRA in 2010 are eligible for special 2010 deferral rule<br />Beginning in 2010 anyone can roll over to a Roth IRA, regardless of income limits or marital status--even non-spouse beneficiaries <br />Rollovers from employer plans can be complicated, and can have serious tax implications<br />
  33. 33. Using the New Rules to Fund Annual Roth Contributions<br />You can contribute up to $5,000 to a Roth IRA in 2010<br />Individuals age 50 or older can make additional “catch up” contribution of $1,000<br />Annual contributions may be limited depending on income level and filing status:<br />
  34. 34. Using the New Rules to Fund Annual Roth Contributions<br />Even if you can’t contribute to a Roth IRA because of the income limits, you can contribute to a traditional IRA if you’re under age 70½ <br />Anyone can convert a traditional IRA to a Roth beginning in 2010, regardless of income or marital status<br />You can make nondeductible contributions initially to a traditional IRA <br />Convert that traditional IRA to a Roth<br />Remember to aggregate your traditional IRAs when calculating tax<br />Traditional<br />IRA<br />Roth IRA<br />First contribute to: <br />Then convert to:<br />Up to $5,000 in 2010 <br />($6,000 if age 50 or older)<br />
  35. 35. Is a Roth Conversion Right For You?<br />
  36. 36. Is a Roth Conversion Right For You?.<br />
  37. 37. What if a Conversion Doesn’t Work Out? “Recharacterize!”<br />You may be able to undo, or “recharacterize,” a conversion by carefully following IRS rules<br />Deadline is due date for filing your tax return for year of conversion, plus extensions<br />For example, you generally have until October 15, 2011, to undo a 2010 conversion<br />Assets are transferred to traditional IRA; treated for tax purposes as if Roth conversion never occurred<br />Can convert traditional IRA back to a Roth after waiting period, which can be as short as thirty days.<br />
  38. 38. Conclusion<br />I would welcome the opportunity to meet individually with each of you to address any specific concerns or questions that you may have.<br />
  39. 39. Disclaimer<br />Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.<br />

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