One Reason to Consider a Roth IRA

In 1998 an interesting law was passed—the IRS Restructuring and
Reform Act. Some of its impacts have already been felt, but if you are in a higher
tax bracket and want to pass IRA assets to your heirs, there is a new provision
that went into effect in 2005, and you should know about it.

Many seniors prefer Roth IRAs since any investment growth occurring
within these accounts come free of federal income taxes and never have to be
distributed while the account owner is alive. Although traditional IRA distributions
are generally taxable to both the original account holder and beneficiaries, any
money from Roth accounts pass free of federal income tax to you and your heirs.

However, if your modified adjusted gross income (MAGI) exceeds
$100,000 you can’t convert your traditional IRA to a Roth IRA. This limit applies
across the board to both single and joint/married taxpayers. Prior to 2005, any
amounts converted from traditional IRAs were counted against the $100,000
limit. Additionally, any RMD received by the taxpayer from traditional IRAs were
also counted against this limit.

Under the new rule that went into effect in 2005, however, the conversion
amount and RMD are not counted against your MAGI for conversion eligibility
purposes, which would allow you to do a full Roth conversion in both cases. As a
practical matter, some people may want to spread the conversion over a period
of years so that they can better manage the taxes owed on any earnings and
pretax contributions. Although you’ll have to pay the upfront federal income tax
on the entire converted amount, withdrawals from the Roth account are income
tax free for yourself and your beneficiaries too.

As a general rule, A Roth account holder must be at least 59 ½ years of
age and have held the account for at least 5 years to escape the taxes and
penalties associated with early withdrawals, and early withdrawals of earnings
from Roth accounts will be subject to ordinary income taxes and a 10% early
withdrawal penalty. However, early withdrawals are treated as being taken first
from your principal contribution. This means that the income and penalty can be
avoided as long as your withdrawals did not exceed your principal contributions.
Since deficits are mounting, there is no guarantee this conversion benefit
will last, or that tax brackets will stay as low as they are currently. Now could be
a good time for some income tax planning to see if a Roth IRA conversion will
benefit you. Also, if you are not sure about your RMD or do not understand the
possible tax consequences your beneficiaries may face when they receive your
IRA, please ask me.

What steps can you take to provide yourself with a comfortable retirement?
Please contact me to learn more. If you would like to meet either in person or by telephone, please use the CONTACT US link and let me know.

I look forward to meeting you!