ROTH Conversion Considerations

posted by Chris |  Over the next few months, you will start to hear and read about ROTH conversions.   I thought we could address the topic with a broad based overview. 

In 2010, Congress has allowed owners of traditional IRA’s to convert them into ROTH IRA’s.  You may recall that a ROTH IRA allows for tax free withdrawals at retirement, no required minimum distributions and they are funded with after tax, (non deductible) contributions.  Obviously if you convert, there is a catch – you either pay the taxes in 2010 or split the tax bill evenly in 2011 and 2012 (at the 2011 & 2012 tax rates). 

One of the considerations to convert is whether you think that your federal income tax bracket will be higher at retirement than it is presently.   A linchpin in the decision making process is the ability to pay the taxes ‘out of pocket’ rather than out of the traditional IRA.  

Ideal candidates can are young, high income earners or retirees who have estate tax considerations.   Some people may want to have their retirement assets diversified between taxable and tax free.

I am recommending that my clients contact their CPA to discuss the tax consequences of the conversion process and your potential tax liability.  Not only could a conversion push you into a higher bracket, you may lose some tax credits and deductions.  If you are a social security recipient and a Medicare member – it may affect your medicare premiums and social security taxation.

If you have estate tax concerns, you most probably have an estate planning attorney.  A ROTH conversion may help your estate tax situation and can be utilized to tactically transfer funds to beneficiaries when you pass on.  Your estate planning attorney can be an invaluable resource in this decision making process.

Finally, your financial advisor can assist you in assimilating the input from your CPA and attorney.  We can discuss which IRA assets should be converted and where you will fund the tax liability.

Some of the problems with the conversion conversation are the many variables.  What if tax rates DON’T go up? What if we retain the tax brackets or possibly lower them, but add a National Sales Tax?  What if we increase the gas tax as well?  What if Congress limits “excess” withdrawals from a ROTH in the future?

In the final analysis, the conversion calculations and your assumptions are what will help you make the correct decision for you.

If you are interested in learning more, please feel free to call me at (352) 225-3132.

Christopher J. Conner
Certified Financial Planner TM
Certified Fund Specialist
Managing Director


 
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