Wednesday, July 29, 2009

Is it Time for a Roth IRA Conversion?

When it comes to retirement planning, conventional wisdom has always dictated deferring income until you retire. A lower tax bracket will probably prevail once retired. The bigger question now... does this rule still apply?

Our national debt is expected to surpass $10 trillion this year. A staggering figure! This has many people speculating... me included... that current tax rates are unsustainable. At some point, the IOU's issues all over the world via our US Treasury Department will have to be repaid.

It's great to think this will occur through current income tax collections, estate taxes, capital gains, etc. Unfortunately, I think the math is faulted. Higher taxes will probably be coming in the near future. Further, while the Obama Administration feels higher net income people could foot the bill, the income threshold is already starting to come down. At some point, it will probably be spread across all income levels. I don't think he will have a choice.

If you believe tax rates are going to increase, there are several reasons to consider a Roth IRA conversion:

    1. Investors are not required to do a full conversion. Converting some funds to a Roth IRA gives the investor a hedge against future tax increases.

    2. Investors will pay less in taxes for conversions today than they would have several years ago when their IRA account values may have been higher.

    3. For long-term investors converting during the current bear market, all the gains i the next bull market will grow income-tax free for life.

    4. The Tax Income Prevention and Reconciliation Act of 2005 eliminates the $100,000 income restriction for conversions in 2010 and half the income can be recognized in 2011 with the balance in 2012.

    5. The Pension Protection Act of 2005 says that employer plans can now be converted directly to a Roth IRA and retirement or separation of service is considered a triggering event. If a 401k plan offers in-service withdrawals, those distributions can be converted to a Roth IRA. Plus, beneficiaries of an inherited employer plan can now convert those funds directly to a Roth IRA. (Note: $100,000 income limit still applicable for 2009)

    1 comment:

    converting ira to roth ira said...

    Now there’s a talk going on about people converting their IRAs into Roth Individual Retirement Account. Roth Ira is the best for the people who are on the right side of age, because the Roth IRA allows for tax waiver. You can always compare between the pros and cons of a Roth IRA account and a normal IRA account and then decide upon it.