Howdy folks! As a brief introduction, I am a second generation CPA, born and raised in Carson City. My grandfather, Ed Bullis, was a local businessman who, among other things, founded KPTL radio. He also wrote a weekly newspaper column while running a business in Wyoming. My father, John Bullis, CPA, used to write this column a few years back. I am now stepping up to the plate and taking my turn at the bat, so to speak. I hope you enjoy reading these columns, and I would appreciate hearing your comments and ideas.
Without further ado, let's begin the journey:
As the end of 2009 approaches, a significant long-term tax savings opportunity awaits many individuals. Beginning in 2010, taxpayers will be able to convert their traditional IRA (and funds that have been rolled over from a qualified plan) to a Roth IRA, regardless of their income level or filing status.
Bonus - the tax created by converting may be deferred until 2011 and 2012. This new conversion option presents both tax planning opportunities and challenges for 2009, 2010, and 2011.
An IRA to Roth IRA conversion should be considered by individuals who:
• Can afford the tax on the converted accounts;
• Anticipate being in a higher tax bracket in the future than they are currently in;
• Have a significant amount of time before reaching retirement to allow assets to grow tax-free and recoup dollars that may have been lost due to the conversion tax.
What's the big deal?
You may ask, "What's the big deal about a Roth IRA?"
Roth IRAs have three major advantages over traditional IRAs:
1. Roth IRA distributions are tax-free, if they are qualified distributions.
2. Roth IRAs are not subject to the required minimum distribution (RMD) rules that apply to traditional IRAs as well as individual qualified plans. Therefore a Roth IRA account holder who reaches age 70 1/2 does not need to begin taking distributions. Instead, the funds can continue to grow tax-free until they are needed or are passed on to heirs.
3. Roth IRAs can be passed along to your heirs without causing them to pay a significant tax upon their withdrawing the funds after your death. (This is a great estate planning issue.)
One option is that if you anticipate being below the $100,000 adjusted gross income level for 2009, you might want to consider converting to a Roth IRA right away, while your traditional IRA account balance is still low because of stock market declines. On the other hand, waiting until 2010 and deferring payment of tax is very tempting.
There are a significant number of tax and financial considerations that come into play when determining whether to convert your traditional IRA to a Roth IRA. If you have any questions about traditional IRA to Roth IRA conversions in the new 2010 planning opportunity, you should contact your CPA to help you make the right decision for your specific situation.