Taxpayers
with six-figure income who like to plan far ahead should be aware of a
potentially lucrative provision contained in the recently enacted Tax Increase
Prevention and Reconciliation Act. The new law provides that, beginning in
2010, the rules that currently prevent a taxpayer with more than $100,000 in
income from converting a regular individual retirement account (IRA) into a
Roth IRA will be eliminated.
In
a regular IRA, the taxpayer gets a deduction for dollars he puts in and his
earnings grow tax free, but he pays ordinary income tax on every dollar he
takes out, and withdrawals are subject to significant restrictions. In a Roth RIA, the taxpayer gets no tax
deduction for contributions, but his money grows tax-free and there is no tax,
and few restrictions, on withdrawals.
Under
current law, only taxpayers with $100,000 or less in modified adjusted gross
income can convert a regular IRA into a Roth IRA. A taxpayer making the conversion generally must pay tax on money
he takes out of his regular IRA, but once it is in his Roth IRA, he won’t pay
tax on that money or the money it earns.
Generally speaking, Roth conversions appeal to taxpayers who either
think their tax rate will go up in retirement, or believe that the value of
their account will rise significantly, and thus are willing to make an upfront
tax payment when they convert in order to reap large tax savings in later
years.
Under
the new law, beginning in 2010, taxpayers with more than $100,000 of modified
adjusted gross income also will be able to convert a regular IRA into a Roth
IRA. To make such conversions more
attractive in 2010, the new law permits taxpayers who convert in 2010 to spread
the income and resulting tax payments on the converted funds over two years –
2011 and 2012.
We hope this information is helpful. If you would like more details about this provision of the new law, or if you would like to discuss any aspect of your retirement planning, please do not hesitate to call.
