The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) created a window of opportunity for us to convert Traditional IRAs, 401(k), 403 (b) and other qualified plans to Roth IRAs. A Roth Conversion may not be appropriate for everyone and other restrictions may apply however for the large majority converting to Roth in 2010 may be a golden opportunity.
In 2010 the restrictions that prevented most Americans from converting to a Roth will be lifted and taxes on the conversion can be split up between 2011 and 2012. This split of taxes over two years is only available for those who convert in 2010 only. Converting to a Roth will allow for tax free growth, tax free distributions and an income tax free transfer to non-spousal heirs.
There are certain ways to perform a Roth Conversion that may be more favorable than another. According to Ed Slott, Roth Conversions are more beneficial for those who can pay the income taxes from an outside account. For example if someone had a $100,000 IRA to convert at a 25% effective tax rate and also had $25,000 in a cash position earning a 1% they may be better off using the cash accounts to pay the taxes rather than the account itself. This way you would have the full $100,000 working for you income tax free moving forward.
There is a second strategy that involves using leverage and the least amount of today’s dollars to convert to a Roth IRA. This involves careful analysis and the assistance of a qualified retirement specialist who understands these concepts.
The bottom line is that if you feel future taxes are going to be higher, it might behoove you to take advantage of this opportunity to pay the taxes on those IRAs today at a lower rate rather than later, and then grow it tax free from here.
For a referral to a qualified Retirement Specialist who can assist you in identifying the suitability of a Roth conversion for you, call me, Rico Revilla, at (866) 416-1055.
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2 comments
Now there’s a talk going on about people converting their IRAs into Roth Individual Retirement Account. Roth Ira is the best for the people who are on the right side of age, because the Roth IRA allows for tax waiver. You can always compare between the pros and cons of a Roth IRA account and a normal IRA account and then decide upon it.
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