Ronald Sadoff
Sadoff Investment Management
In 2010 the $100,000 income limit is gone for Roth IRA conversions, so now anyone regardless of income can convert to a Roth. Remember traditional IRAs grow tax free but are taxable upon withdrawal, while with Roth IRAs you pay the tax up front and the money grows tax free and is withdrawn tax free. Before converting any IRA assets, we suggest you speak to your CPA. Below are some bullet points to consider.
- The $100,000 income limit for Roth conversions is waived indefinitely, not just for 2010.
- The only Roth IRA deal that expires in 2010 is the ability to have half the taxable converted amount taxed in 2011 and half in 2012.
- Depending on your tax bracket you may not want to defer the tax to 2011 and 2012. For example the highest tax bracket is set to increase from 35.0% federal tax to 39.6%. Utilizing this option may cause you to pay more in tax.
- A Roth conversion may affect your taxation of social security and Medicare. It may also have an effect on future estate taxes.
- You should consider the tax implications if you plan on retiring to a state with no income tax (Florida, Nevada, Texas, etc).
- If you are converting your IRA to a Roth it is usually suggested that you have the money to pay the tax in a taxable account instead of paying the tax from the IRA.
- While it depends on your personal circumstances, converting to a Roth IRA will not make sense for the majority of people. If you convert while you are working you may pay a lot of taxes now at a higher rate, versus paying them later at a lower rate when your are retired.
- It often makes sense for someone with 20+ years to retirement to convert to a Roth since they have a longer time for tax-free growth.
- If you are in a much lower tax bracket now versus later, it might make sense to convert.
- Check with your CPA before making any Roth conversion decisions.
Editor's Note: The Major Trends is published monthly for clients of Sadoff Investment Management LLC, 250 West Coventry Ct., Ste. 109, Milwaukee, WI 53217. www.sadoffinvestments.com.
