The Tax Attic with Jerry Coon — December 3, 2009

December 3, 2009 // 0 Comments

Tips on converting IRA to Roth IRA A topic that has come up in multiple discussions the last few weeks is the Roth Individual Retirement Account (IRA) situation. Specifically, it seems that every financial planner and money manager is touting the conversion of traditional IRAs to Roth IRAs and, in many instances, it makes very good sense to do so. Seldom does it make sense to pay tax on income sooner than the Internal Revenue Service requires it, so there must be some very special circumstances involved. Let’s discuss those circumstances and what exactly is meant by converting an IRA to a Roth IRA. The process starts with having an IRA. This IRA might have come from making contributions to the IRA or rolling a deferred compensation plan such as a 401k from a job to an IRA. Once the money is in the IRA, the taxpayer can convert the IRA funds into a Roth IRA. The value at the time of conversion is taxable to the taxpayer. In 2009, the conversion is fully taxable as 2009 income. However, only taxpayers with income of less than $100,000, not counting the conversion amount, are eligible to make conversions. In 2010, the rules change. First, the taxpayer can elect to pay all of the tax in 2010 for a 2010 conversion, or may elect to defer paying the tax past 2010 and pay tax on 50% of the conversion in 2011 and 50% of the conversion in 2012. Second, the $100,000 income limitation is eliminated. It is estimated that between two and three trillion dollars in IRAs will be converted to Roth IRAs in the next few years. Yes, that is TWO to THREE TRILLION dollars of conversions. The federal government is going to get an instant infusion of tax revenue of gigantic proportions. Most of this two to three trillion would potentially have been taxed at much lower rates had it been left in the IRAs and withdrawn onlyawhen required. Since required distributions only start at age 70.5, those required distributions might not have started until years down the road. What would cause people to pay taxes on two to three trillion dollars of income right now? There are a couple of reasons. First, I call […]