NOTE: This article is not exhaustive and does not address subtle details, which should be explored with the appropriate advisors, such as an appropriately licensed, and qualified attorney, financial planner, investment advisor, etc. This article comments on certain legal and tax issues; it is recommended that you also explore administrative (e.g. custodial), estate, and investment issues before you invest.
R |
oth IRAs, named after Senator Roth, were created to allow individuals to responsibly save for retirement when they were not allowed to contribute to Traditional IRAs.
Typically, high-income earners could neither, contribute to a Roth IRA, nor convert their Traditional IRAs to a Roth. However, for this year only, the restrictions on converting to a Roth IRA are relaxed.
Should you convert?
Long-Term Considerations: The money earns/grows tax free. You never have to take the money out. If you do take money out, it comes out tax-free. There’s no 70 ½ start date for ‘required minimum distributions’; there’s no requirement at any age. Therefore, you can save on income taxes (not estate taxes). Do you lose 25% - 50% of your income to taxes?
Short-Term Consideration: To convert another type of retirement plan to a Roth IRA will require you to take out a taxable distribution. If you’re under 59 ½, you will NOT have to pay the ‘early withdrawal penalty. However, you will have to pay income tax at your regular income tax rate - but, not until the future, and then, over two years, should you elect.
This may be beneficial based on a number of custom considerations:
· You don’t have to convert all of your other retirement account amounts; you can pick and choose what and how much.
· Will you need this money to fund retirement? (Or can it go to heirs?)
· If you’re under 59 ½, can you let the principal sit for at least five years?
· How long can you let the entire amount grow?
· What might your tax bracket be at retirement, or age 70 ½, based on your other income and what you project for tax rates wherever you’ll be living? (e.g. lower than while working - or the about the same?! Living in another country or low-tax state?)
· Are you subject to the AMT (Alternative Minimum Tax)?
· Will your tax rate be lower in 2011 and maybe 2012 than in 2010? That’s when the taxes are due unless you elect to pay them with 2010’s taxes. (e.g. you’re not working, or have many tax deductions)
· Do you have the cash to pay the taxes? (If you take it from the account, you lose some of the benefits, and may be subject to early-withdrawal penalties. Moreover, might you have to sell something in the account to create cash? If you have to sell something, is there a cost? And will you miss potential profits?)
· How long can you let the money grow? (It needs to grow long/fast enough to make up for the taxes you pay now, regardless of where you get the tax payment money.) Can it grow to such a large amount, that it will be bigger than if you left it where it is, minus income taxes?
· If you convert in 2010, the law will allow you to pay the taxes on the conversion over a two year period (2011 and 2012 which means due dates of 4/16/12 and 4/15/13!), with no penalties or interest, so you have time to come with the tax money or let it grow wherever it already is).
· These conversion distributions are not considered income for purposes of reducing Social Security benefits!
· Have you wanted to convert to a Roth IRA in the past, but not been allowed?
· Have you wanted to contribute to a Roth IRA?
· Do you want to contribute to a Roth IRA (if you can)?
This may not be an easy decision. Then, again, with a professional’s help, it might be academic. It may be about minimizing taxes rather than maximizing gains. It could cost what seems to be a lot of money now, but it could cost you more later! You’ll need to carefully choose. Speak to Simons Financial Network or your trusted advisor to make a smart decision.
TWCTXYF4ZHQ4
No comments:
Post a Comment