We all must pay taxes. But when we pay certain taxes is a choice we can each make, especially when the rules change. Making the right decision about converting a traditional IRA to a Roth IRA could save your estate thousands of dollars in income and estate taxes.
Until this year, taxpayers could only convert funds to a Roth IRA if their adjusted gross income was under $100,000.00. Starting in 2010 conversion is open to anyone regardless of annual income.
Why could converting to a Roth IRA be beneficial? A traditional IRA allows tax deductions for contributions and grows, tax-deferred. A Roth IRA does not provide up-front deductions, but earnings and withdrawals are tax-free. And unlike a traditional IRA which requires minimum distributions starting at age 70 1/2, a Roth IRA does not require minimum distributions during your lifetime. A Roth IRA could provide a number of advantages depending on your age, the growth rate of your funds, and your total retirement needs. Say you have a $1 million IRA balance and $300,000 in other funds. If you convert to a Roth you could use the $300,000 to pay taxes. Then the $1 million Roth IRA and all future earnings on it will not be taxed at withdrawal. Further, as the law stands, in 2011 anything over $1 million in your estate would be taxed at a rate of at least 41% at your death. In this case, converting could save estate taxes of $124,000.
Should you make the switch? If you convert, you can undo the conversion or “recharacterize”, until October 15, 2011, the extended due date for 2010 tax returns. If a stock increases dramatically in value you may choose to stay in the Roth IRA since withdrawals are tax-free; if the stock falls, you could un-do the conversion.
Converting to a Roth IRA could reduce the value of your estate for tax purposes, let you take distributions tax-free, and avoid minimum distribution requirements.
Do you have a question(s) not addressed here? If so, contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com/ to schedule a consultation about your particular needs. He welcomes your calls and inquiries and you’ll find him very approachable and easy to talk to.