FINANCIAL FOCUS: Think before you roll -- 2010 Roth IRA conversions
Robert L. Nistendirk Jan. 21, 2010, 1:30am
CHARLESTON - Year 2010 brings one of the biggest IRA planning opportunities in quite some time, opening the door for many individuals to participate in Roth IRA conversions. This has created a big buzz in the retirement planning arena.
Key points in new Roth IRA conversion rules:
* A Roth IRA conversion allows eligible individuals to convert all or part of their retirement assets such as traditional IRA, 401(k) and 403(b) accounts to Roth IRAs.
* In 2009 you were eligible to convert to a Roth IRA if your adjusted gross income (AGI) was $100,000 or less. In 2010 the AGI limit is lifted, meaning everyone will be eligible to convert to a Roth IRA.
* Normally you must claim the entire conversion amount as income the following year. In 2010 you can opt to recognize half the conversion amount as income in 2011 and other half in 2012.
If you don't have enough cash outside of your retirement account to pay the tax, then it makes less sense to convert to a Roth IRA, because you will lose the potential benefits of tax-free growth on that amount. It will be even worse if you are under 59½ at the time of conversion and incur a 10% early distribution penalty.
While worth considering, Roth conversion decisions are generally not as crucial as some might think. One important exception is estate planning. Some people should consider converting to a Roth IRA for estate planning purposes for several reasons. Some are:
* Unlike traditional IRAs, Roth IRAs don't require a person age 70½ or older to take minimum distributions, which means your account can continue to grow tax-free until your heirs are ready to withdraw the money.
* If your spouse inherits the Roth IRA, he or she will not be required to take any minimum distributions either.
* By paying the conversion tax up front, you eliminate the income tax your heirs would otherwise have to pay on withdrawals from an inherited traditional IRA.
* Converting to a Roth IRA will reduce your taxable estate by the amount of income tax you pay to convert.
The bottom line is to be patient. Nothing has to be done before year end. Meanwhile much will be said and written about the topic. An excellent article is available on the January 2010 Journal of Accountancy web site.
One time-urgent opportunity is for high-income individuals who do not have deductible IRAs. If your 2009 income was too high to do a Roth IRA, make a nondeductible IRA contribution before April 15. Immediately convert the IRA to a Roth. Because there will be no income earned, there will be no tax due upon conversion. The Roth will grow tax free whereas the traditional IRA would not.
As tax season approaches, this will be my last article for The West Virginia Record. I would like to express my sincere appreciation to Chris Dickerson and The Record staff for allowing this enjoyable opportunity. I also wish to thank co-author Shehna Khan for her magnificent contribution of time and talent, as well as co-editors Robert Samples and Sheri Skidmore.
Nistendirk is a partner at Woomer, Nistendirk & Associates PLLC, a CPA firm located in Charleston. Bob has extensive experience in tax accounting, strategic planning and financial/business consulting. He can be contacted at email@example.com.