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ABOUT TIME TO CONSIDER SWITCHING YOUR IRA TO A ROTH IRA

ABOUT TIME TO CONSIDER SWITCHING YOUR IRA TO A ROTH IRA

For more than a decade, Roth IRA accounts have been one of the best tax breaks available. Once age requirements are met, earnings on already taxed dollars are withdrawn tax-free.

Changes in 2010

Through 2009, adjusted gross income could not exceed $100,000 (single or married) to qualify for a conversion of a traditional IRA account to a Roth IRA. Now, in 2010, a new opportunity arises as income limits on Roth IRA conversions are permanently repealed. As an added bonus, the tax bill can be spread over two years for conversions that take place in 2010.

The question is, “Does switching to a Roth make sense now?” As federal and state deficits grow, concerns over increasing tax rates become more frequent. If tax rates will increase in the future, then the current lower tax rate plus diminished account values due to the economic crisis present two arguments in support of converting to a Roth. Switching to a Roth now will have a tax impact up front, but as the market recovers, the money in the account will grow tax-free through retirement and upon its withdrawal.

Leave it to Your Kids Tax-Free

Additionally, Roth IRA accounts trump all other accounts for leaving a tax-free benefit to your heirs. The account is inherited tax-free and there are no required distributions for Roth owners. Certain rules must be followed, however. For instance, a non-spousal heir must set up an ‘inherited IRA’ with the deceased’s name on the account. If there are several beneficiaries, the account should be split into separate inherited IRAs. If the beneficiaries are in a lower tax bracket than the account holder, it may not make sense to convert.

Estate Tax

Finally, conversion to a Roth could also eliminate or lower federal and state estate taxes. Depending on your tax bracket and estate value, tax paid on the conversion could drop the estate below the estate tax exemption.

With the markets down in 2009 and the opportunities arising in 2010, now is the time to decide if a conversion is right for you.

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