Converting an I.R.A. Into a Roth………
Posted By thestatedtruth.com on July 19, 2009
Converting an I.R.A. Into a Roth?
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 July 18, 2009
You’ll be hearing a lot in the next six months about Roth Individual Retirement Accounts — but not as much as you should about a long-term threat that hangs over them.
Starting Jan. 1, you’ll be able to take a regular I.R.A., say, one that you have in a brokerage account after having rolled an old 401(k) into it, and turn it into a Roth. You’ll be able to do this no matter how much money you make, though you’ll have to pay income taxes at your current rate on whatever you move. Currently, you can’t make the conversion at all if your household has more than $100,000 in modified adjusted gross income. (That’s a technical Internal Revenue Service term, which it defines in Publication 590, available on its Web site).
Why would you want to make such a swap? Because you think you or your heirs could end up with more money over the long haul by investing in a Roth instead of a regular I.R.A.
With a Roth I.R.A., you pay no taxes on your earnings in most instances when you take money out; distributions from regular I.R.A.’s are taxable the same way that income is, though the basic I.R.A. does offer a tax deduction when you first deposit money into the account. The Roth offers no such deduction when you contribute money to it.
So if you think your tax rate will be higher during retirement than it is now, say if you’re fairly young for instance, making the conversion early in 2010 looks sensible.
It all seems pretty simple, until you consider this: The tax laws might change substantially, throwing all of your careful planning into utter disarray. We’re currently staring down years of federal budget deficits and decades of looming Medicare and Social Security obligations. If wealthy people convert their retirement funds to Roth I.R.A.’s in large numbers, won’t all of that newly tax-shielded money look tempting to government officials years from now?
There is no way to know, and admitting the futility of making a specific prediction is where you have to begin this analysis. After all, if you get serious about your money at 40 and live until you’re 90, that’s a half-century for which you need to plan.
Still, many financial planners are concerned enough about the possibility of huge changes in the Roth rules that the looming opportunity in 2010 has inspired an orgy of spreadsheet creation and client outreach. Think all of this activity is simply an attempt to stoke fear among investors and charge fees for alleviating it? That would make you as cynical as all of the people who are certain that Roths are a big lie and the tax-free earnings simply cannot stand for more than another few years. Neither is likely completely correct, so let’s take a quick look at both arguments before trying to figure out what to do with your own I.R.A.
HOW ROTHS MIGHT CHANGE At the most extreme end, the federal government might try to tax the earnings on a Roth after all, say through the capital gains tax, which is currently at 15 percent for long-term gains but could go up in the next few years. Or it might levy some sort of an excise tax on excessive balances, however those might be defined.
Roths are especially useful for estate planning purposes. Regular I.R.A. holders have to start taking money out once they reach the age of 70 and a half, but Roth owners don’t have to take money out during their lifetimes. Heirs of Roth holders, meanwhile, pay no income taxes when they cash out of the inherited account and can spread those distributions over an entire lifetime, allowing for decades more of tax-free growth thanks to the wonders of compound interest. Some part of this could certainly change.       More………….
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