Is a Roth IRA Conversion Right for You?

We’ve been discussing ideas to accelerate income and pay taxes with 2012 tax rates rather than with the anticipated future increased tax rates.  Converting a traditional IRA to a Roth IRA has been a hot topic for the last few years, and continues to be in the current conditions.  This is a complicated decision and should include discussions with both your tax advisor and financial advisor.

In the past, it was almost always a recommendation for younger tax payers to make the conversion in years with large ordinary losses.  When you make a conversion, you have to pick up the entire amount as income and pay tax.  If you could pick up the income in a year with large losses, you might have accomplished the conversion with little or no tax cost.  If you anticipate ordinary losses in 2012, this is still a strategy to consider. Capital losses don’t count!

It’s also a strategy to consider for taxpayers in the higher brackets even if you don’t have losses to offset the income.  Depending on your financial forecast, it may be beneficial for you to pick up the income this year with low 2012 tax rates and have tax free distributions later in life, rather than have taxable distributions in the future at potentially higher tax rates.

There is speculation that Congress might close this “loophole” soon.  There is no other tax advantage like this where you can grow money tax free.  Therefore, if you’ve been considering a conversion or starting a Roth IRA from scratch, I strongly suggest you do it now and put as much money into it as possible. Generally limitations on Roth IRA contributions are the same as traditional IRA contributions.

Tax planning involves a lot of hypothetical considerations and future predictions.  Tax planning is about paying as little tax as legally possible over your entire life, not just year to year.  This year in particular is a good example.  We are taking a close look at our clients and asking, should we pay more tax this year to save in future years?  Not all taxpayers have the cash flow to consider these options, but if you do, this is the year to think about it.

As always, seek advice from your tax advisor when considering your planning strategies.

 

 

One Response to “Is a Roth IRA Conversion Right for You?”

  • Thanks Jessica for solid insight into the Roth Conversion option. I sent out a similar email to my clients as well. This is an important topic to be proactive about. The more tax free income we can create a retirement the better. Merry Christmas and Happy New Year. Mike

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