Guest Columnist: Ronit Rogoszinski
Over the past months changes have been made to the tax code as to allow a greater pool of retirement savers to convert their IRA’s to ROTH IRA’s. The question everyone is asking is, is it worth it for me? So let’s take a few minutes to understand the pros and cons of this process.
In a Roth IRA contributions are on an after-tax basis where the earnings accumulate tax free of federal taxes and when an investor reaches retirement and begins withdrawing money, there are no taxes to pay on earnings. In order for withdrawals to be tax free, the account owner must be at least age 59 ½ and have owned the account for 5 years. If these conditions are not met, taxes and tax penalties may apply. An IRA however is comprised of contributions that may be deductible and earnings grow tax deferred for Federal taxes. When an investor reaches retirement and begins withdrawing money, taxes must be paid on any earnings. In fact by age 70 1/2 an investor has to take out mandatory distributions or pay a penalty.
The Tax Increase Prevention and Reconciliation Act of 2005 made several changes that benefit investors as income limits on converting an IRA to a ROTH were eliminated in 2010. Special tax treatment is now available to all those who convert to a ROTH in 2010 as well as direct rollovers from qualified plans to a ROTH are now allowed. However, income limits on contributions to a ROTH remain.
So once again we ask, why convert to a ROTH? First and foremost withdrawals from the ROTH are tax free. Right now in 2010 our highest tax rate is 35% on income tax which will increase in 2011 to 39.6% thus increasing the value of a tax free. In fact for the past 50 years, there have only been 5 years (1988-1992) where the top rate was less than the current 35%. It’s important to note that qualified tax free distributions from ROTH’s do not affect social security taxation unlike tax exempt interest, series EE bond income and traditional IRA distributions.
Another advantage for women planning for retirement income is to remember that there are no required mandatory distributions from ROTH IRA’s which is a distinct advantage in estate planning. In fact tax on conversions is prepaying taxes, a gift for heirs as they will not owe any taxes upon inheriting ROTH’s.
Another benefit is that if you elect to convert an IRA to a ROTH you can elect to defer half the tax liability to your 2011 tax return and the other half to your 2012 tax return. Also, for the first time higher income individuals with adjusted gross income of more than $100,000 are eligible to convert. In addition the low-cost conversion opportunity exists now as you have the ability to lock in today’s low tax rates and receive a special tax treatment for 2010 and 2011. Realize that in the past several years many have suffered losses in their portfolios which if converted to ROTH IRA’s now, the recovery may be a tax free recouping of your losses. Remember that investing in securities is subject to fluctuation which may result in loss of principal.
Finally several considerations need to be addressed and should be discussed with your tax and financial advisors: what is your time horizon, what are your current income-tax brackets and your anticipated income-tax bracket in retirement, and finally what assets are available to pay the resulting conversion taxes.
If converting your retirement plan to a ROTH makes sense, go for it now as it’s a great time to get going to maximizing your investment plans.
Bio:
Ronit Rogoszinski has been helping individuals and professionals understand the world of finance and wise personal money management for over twenty years.
A graduate of Queens College’s Scholars Program, Ronit holds FINRA Series 7 and 66 registrations through LPL Financial and is New York State certified in Long Term Care Insurance. As the proud mother of four children, Ronit understands firsthand the demands we all have in our fast paced lives. Yet her calm, personal and relaxed nature help to put her clients at ease while remaining focused on the job at hand – realizing and bringing them closer to their financial goals.
ABOUT KALÖN WOMEN: The mission of Kalön Women is to provide answers and raise awareness of issues and causes that affect women 40+, so that they will be stronger from knowledge gained, and the generation of women who follow in their path will hopefully find it less rocky. The articles, stories, poetry and other written expressions in Kalön Women are created by real women 40+. Written to inspire, help and perhaps provide a few laughs to all “women of a certain age”.
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