2010: The Year of the Roth
Unprecedented national spending including stimulus payments, financial bailouts, escalating Social Security and Medicare costs, and foreign conflicts foreshadow looming tax increases on the horizon. The Obama administration has already announced plans to contend with the surging national debt, and it includes increasing 2011 taxes on households with income over $250,000. Individuals can help shield themselves from some of the effects of the predicted tax hike by taking advantage of an unprecedented Roth IRA tax conversion opportunity – but time is running out.
Roth IRA’s were initially created to encourage low-income earners to save for retirement. Historically only households that earned $100,000 a year or less could participate. Now the government is waiving the income restriction on Roth IRA eligibility. Starting in 2010, anyone with money inside of traditional retirement accounts funded with pre tax dollars may convert these accounts over to a Roth IRA.
A Roth IRA differs from all other retirement vehicles in the manner by which investors contribute to and withdraw from this type of account. Unlike deductible retirement accounts where investors contribute before tax money, Roth IRA’s are funded with after tax money. While the account owner loses the ability to deduct the contribution amount from their income taxes, they gain a very unique long-term planning opportunity – the ability to make qualifying withdrawals down the road completely tax-free.* That’s right! Imagine an account that allows you to make investments that grow completely free of all taxation.
There are several types of investors who should consider taking advantage of this opportunity – such as those who:
- predict tax rates will be higher in the future and want to pay taxes on their retirement savings at today’s known rates;
- have sufficient after tax money in a cash reserve account earning little to no interest and can afford to pay the taxes associated with the conversion;
- are interested in exploring ways to reduce the size of their taxable estate and currently have a substantial amount of assets in pre tax retirement accounts;
- are looking to eliminate required minimum distributions from traditional retirement accounts that may be creating income tax problems on funds that are not needed for current income;
- and, anyone who is looking to reduce the amount of their taxable social security benefits.
The switch in the Roth IRA conversion policy is great news for many investors. However, it is important to understand what it is and if it is the right option for you.**
*Limitations and restrictions apply
**Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. No strategy guarantees against loss nor ensures a profit. Please talk to your tax advisor about your situation prior to executing any strategy.