2010 will be an extraordinary year for tax law, a tax year so potentially advantageous that we may never see its like again. One probable 2010 phenomenon: a wave of high-income and high net worth individuals converting traditional IRAs to Roth IRAs. Here’s why 2010 represents a great year to make that move.
Income limits: gone. Today, you have to pass an income test before you can convert a traditional IRA to a Roth. If your modified adjusted gross income (MAGI) is more than $100,000, you can’t do it. This limit has long frustrated high-income taxpayers.
In 2010, it’s a whole different story – there is NO income test. Anyone with any MAGI can make the conversion.
While you still can’t contribute to a Roth IRA if your MAGI exceeds $166,000 (joint filers) or $114,000 (most single filers), it is the conversion that is important. Potential advantages: considerable. Many high-salaried people have rolled old 401(k) assets from old jobs into traditional IRAs. In 2010, they can convert them to Roths, which will mean:
Tax-free growth of these assets
Tax-free withdrawals of these assets someday (assuming they are 59½ or older and the Roth IRA is more than 5 years old)
No minimum distribution requirements once you turn 70½
An eventual reduction in their taxable estate
Taxes: deferred. Of course, you will pay taxes on a Roth IRA conversion. But if you do this in 2010, you don’t have to pay them right away. Unless you elect otherwise, the taxes on the conversion will be spread out over the 2011 and 2012 tax years.5In effect, this gives taxpayers the ability to delay full payment of any tax due until 2013.
The non-deductible IRA option. Some high-income earners have opened non-deductible traditional IRAs with the intent of converting them to Roths in 2010.
While a traditional IRA has no contribution phase-outs due to income, high-income taxpayers can’t deduct their IRA contributions like the middle class can. For tax year 2007, for example, the deduction phase-outs (this is MAGI) start at $83,000 for joint filers and $52,000 for single filers and heads of households.
If you don’t qualify to make a deductible IRA contribution or a Roth contribution, the non-deductible IRA lets you make a permissible “end run” to build some assets that can “go Roth” in the near future. If the tax law changes taking effect in 2010 stay in place for years to come, you will be able to open a non-deductible IRA annually (as long as you keep earning income) and convert it to a Roth each year.
Why would Congress give IRA holders a break like this? The simple answer: quick revenue for the federal government. In 2010, a LOT of cash will be pumped into the Roth IRA program, and that will result in a LOT of taxes as a result of the conversions (a short-term revenue boost).
Ready for 2010? Whether you do or don’t convert a traditional IRA into a Roth in 2010, you will want to know about the changes in tax law affecting IRAs and other retirement savings vehicles, and your estate and your investments. Before you make a move with your IRA, talk to us or tax professional who understands the coming rules modifications.
Mark Colgan is an independent contractor with Ensemble Financial Services, Inc. 179 Sully’s Trail Suite 302, Pittsford, NY14534, Member FINRA and SIPC and may be reached at 585-419-2272.
These are the views of Peter Montoya, Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
PERSONAL UPDATE
November was a great month. We celebrated Thanksgiving at my father’s house in Pittsford and had Kathy's family over at our home the day after. This past weekend we got all the Christmas decorations up. Christopher and Emily are VERY excited. Below are some recent pictures:
