Converting Traditional IRA to Roth IRA

 

 

The answer to this question is, “Yes”!  If you have a Traditional IRA you need to at least consider whether it makes sense to convert it to a ROTH.  (Also, SIMPLE IRA’s can be converted if you’ve had it more than two years.)  There are many options for conversions you may not know about.  For example, did you know that you may be able to convert portions of your IRA over a period of time to make the tax burden more manageable?  There is a window of opportunity opening for EVERYONE to get their Traditional IRAs converted to ROTHs.  You owe it to yourself to at least read the rest of this letter.  We know it is long and will take a few minutes, but, it could be the most valuable few minutes you spend on anything today!   

 

As you may know, there are significant differences between a Traditional IRA and a ROTH IRA.  Basically, with a ROTH IRA you pay no taxes on your earnings in most instances when you take the money out.  With a traditional IRA the distributions are typically taxable as ordinary income. 

 

For now, only taxpayers with adjusted gross income at or below $100,000 can convert their IRA to a ROTH.  The price for converting is to treat the converted amount as though it had been distributed.  The amount is included in gross income and you pay taxes on the distribution.  After that, your earnings are generally tax free.  Sometimes it makes sense to do the conversion, pay some taxes now and pay no tax on all future earnings.

 

In the year 2010, the $100,000 limit is being lifted and almost anyone can do the conversion. The tax laws are also going to allow you to spread the tax bill for the conversion over two years instead of paying all of it in the year of conversion.  This anticipated change now has many people who were not previously eligible for a conversion considering whether they should take advantage of this opportunity in 2010. 

 

Another factor that is increasing interest in conversions to ROTH IRA’s is the dramatic loss in value of retirement accounts during 2008 and 2009.  The prospect of conversion is more attractive now to many people because the tax burden will be lower on the reduced value.  When the value increases in the future that growth will be tax-free within a ROTH IRA.

 

Another consideration is the current economic and political climate.  With soaring deficits it is possible that the income tax rates will increase soon and it is very likely the rates will be higher when you retire.  No one can predict what will happen with the tax laws in the future so we all have to plan today based on the known variables and our best  educated guess for the future.

 

There are many opinions on this issue and just as many unanswered questions.  Are you confused?  Are you interested in investigating the possibility of a conversion?  Do you need an analysis of your situation to understand the impact of a conversion?  We can help you with this.  In response to several inquiries from our clients about this issue we have put together a program to help you with a decision that could potentially save you thousands of dollars in taxes over your lifetime.

 

1.  Can you pay the tax on the conversion from assets other than the IRA?

2.  Do you think your future tax rate is likely to be higher than your current tax rate?

3.  Can you leave the converted funds in the ROTH IRA for five years or more before taking distributions?

4.  Is it important to you to save taxes whenever possible?

 

TAKE NOTE:  The circumstances of each person are so varied that each case must be reviewed independently.  There are many rules and there are some costly pitfalls if the conversion is not handled correctly. 

 

For a flat fee of $850 per person we can work with you to review your unique circumstances and to perform calculations to help you determine whether it would make sense for you to take this step.  This is how it works:

 

1.  You notify us that you want the analysis done.

2.  We mail you a questionnaire which you return to us with a check for $250.

3.  We review your information and discuss our preliminary findings with you.

4.  If all parties agree to proceed, we perform the in-depth analysis and create a written report of our findings.  The remaining fee of $600 is paid before work is performed.

5.  We meet with you to go over the results and make recommendations.

 

You should call us today if you are interested.  Especially if you want to convert your IRA in 2009 and think the value of your account will increase before year-end.  Delays could cost you money.  Now is the time to address this question.  You should also call if you have already done a conversion in 2009 and have not yet discussed it with us.  We need to review the transaction to be sure all tax issues have been considered.  Conversions can be reversed within certain limits.

 

Conversions are not appropriate for everyone.  You won’t know if it is right for you unless you have the possibility analyzed by a professional who understands your situation and the applicable tax laws.  As your CPA team, we want to help you maximize your wealth and minimize your taxes.  We’ve strapped on our tool-belts and we’re ready to go to work for you!