Roth IRA Conversions for 2010
A unique opportunity for IRA owners
In 2010, anyone may convert a traditional IRA to a Roth IRA. No income limits will stand in the way of the converstion.1 Should you do it? Here's why it may (or may not) make sense for you to go Roth next year.
Why you might want to consider it. A
Roth IRA permits tax-free growth and tax-free income distributions in
retirement (assuming you are age 59½ or older and have held your Roth
account for 5 years or longer). You can contribute to a Roth IRA after
age 70½, without having to take mandatory withdrawals. While
contributions to a Roth IRA aren’t tax-deductible, the younger you are,
the more attractive a Roth IRA may seem.2
However,
older investors have reason to go Roth as well – especially if they
don’t really need to withdraw IRA assets. Under present tax law,
converting an untapped traditional IRA to a Roth will shrink the size
of your taxable estate, and careful estate planning could foster
decades of tax-free growth for those IRA assets.3
Currently,
if you name your spouse as the beneficiary of your Roth IRA, your
spouse can treat the inherited IRA as his or her own after you die and
forego withdrawals. So those Roth IRA assets can keep compounding
untaxed across the rest of your spouse's life.
If your spouse
then names a son or daughter as a beneficiary, that heir has the choice
to make minimum withdrawals according to his or her life expectancy,
all while the assets continue to compound tax-free. Currently,
withdrawals from an inherited Roth IRA are not subject to income tax.3
Why you might want to think twice about it. The IRS regards a traditional IRA-to-Roth IRA conversion as a distribution from a traditional IRA - a taxable event.4 You'll need to pay taxes on the entire amount of the conversion. Do you have the money to do that?
Keep
in mind, however: with the market down, many IRA values are lower than
they have been for years. That translates to paying less tax on gains.
It is also worth remembering that tax rates could increase in the years
ahead - another reason why now may be a good time to convert. You could
simply do a partial Roth IRA conversion if converting the full amount
would send you into a higher tax bracket.4
You may be
tempted to use the current IRA assets to pay the conversion tax, but
should you? If you're younger than 59½, you’re looking at a 10% penalty
on the amount you withdraw, and you’ll lose the chance for tax-free
compounding of those assets within the Roth IRA.5
Why you might want to fund a Roth IRA this year. In 2009, any withdrawals from a traditional IRA can be used to fund a Roth IRA.6 Interesting. Why is this so?
In
years past, mandatory withdrawals from a traditional IRA typically
couldn’t be deposited into a Roth IRA. But the federal government has
suspended mandatory IRA withdrawals for 2009.7 Any IRA
withdrawals made in 2009 are thereby elective withdrawals. So, if your
adjusted gross income (AGI) is $100,000 or less, you have an option to
fund a Roth IRA with a withdrawal from a traditional IRA – at least
through the end of 2009.6
In 2009, you can fund a
Roth IRA with after-tax contributions to a 401(k), 403(b) or 457
retirement savings plan. This year, you can take those contributions
and convert them to a Roth IRA tax-free, provided your AGI is $100,000
or less. More good news: there is no limit to the conversion amount.1
A potential tax break for those who convert in 2010.
If you do a Roth conversion during 2010, you can choose to divide the
taxes on the conversion between your 2011 and 2012 federal returns.8
Be sure to consult your tax advisor before you convert.
This is a very good idea before you arrange any rollover,
trustee-to-trustee transfer, or same-trustee transfer of your IRA
assets. In any year, you should fully understand the potential tax
impact of a Roth conversion on your finances and your estate. Also,
remember that while the income limit on Roth IRA conversions will go
away in 2010, the income limits on Roth IRA contributions still apply
next year and for the foreseeable future.8
If you are currently a client of Fragasso Financial Advisors, and would like to benefit from the Roth IRA Conversions in 2010, please contact your financial advisor. If you are not currently a client, but would like more information, please contact our firm at 412-227-3200.
These
are the views of Peter Montoya Inc., not the named named Representative
nor Broker/Dealer, and should not be construed as investment advice.
Neither the named Representative nor Broker/Dealer gives tax or legal
advice. All information is believed to be from reliable sources;
however, we make no representation as to its completeness or accuracy.
The publisher is not engaged in rendering legal, accounting or other
professional services. If other expert assistance is needed, the reader
is advised to engage the services of a competent professional. Please
consult your Financial Advisor for further information.
Citations.
1 kiplinger.com/magazine/archives/2009/01/sweet-deal-on-roth-ira-conversion.html [1/09]
2 thestreet.com/print/story/10505164.html [5/26/09]
3 smartmoney.com/personal-finance/retirement/estate-planning-with-a-roth-ira-7966/ [1/22/09]
4 smartmoney.com/personal-finance/retirement/roth-iras-you-wanted-to-know-7967/ [1/9/08]
5 smartmoney.com/personal-finance/retirement/roth-iras-to-convert-or-not-7965/ [1/10/08]
6 online.wsj.com/article/SB123033785000236433.html [12/26/08]
7 usnews.com/blogs/planning-to-retire/2008/12/23/president-bush-signs-pension-relief-bill.html [12/23/08]
8 kiplinger.com/columns/ask/archive/2009/q0601.htm [6/1/09]
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Fragasso named one of Pittsburgh's Best Places to Work, again!
 For the sixth year in a row Fragasso
Financial Advisors has received
recognition as one of the Fifty Best Places to Work in Western Pennsylvania by the Pittsburgh Business Times. We are especially proud of this award because it is based on a survey that is completed by the firm’s employees.
We are grateful to have a staff that works so hard for our clients and who contribute so much to our success. On October 15 2009, ten members of the firm attended an awards luncheon at the Omni William Penn Hotel where the fifty winning companies were honored.
Barron's ranks Fragasso as one of the Top 100 Financial Advisors
Every year Barron’s magazine ranks America’s top 100 independent advisors, as identified by the securities-industry consulting firm Winner’s Circle of Boca Raton, Fla. The rankings reflect each adviser’s assets under management, the adviser’s share of revenue and profits generated, quality of service, and regulatory records. Fragasso Financial Advisors was again ranked as one of the nation’s top advisors in its 2009 list of the Top 100 Independent Advisors.
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