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Roth
IRA Update
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Get prepared
for the Roth IRA!
Starting January 1, 2010 anyone can convert their regular IRA to a Roth
IRA. The $100,000 income limitation is removed for the next two years.
That means if you have a regular IRA you can convert it to a Roth IRA.
The advantage of the Roth IRA is that it grows tax-free, there is no
minimum distribution requirement, and withdrawals after age 59 1/2 are
tax-free. The disadvantage is you have to pay income tax on the
conversion.
Regardless of age, converting from a regular IRA to a Roth IRA always
makes sense if you have sufficient other resources to pay the extra
income tax. So, for example, if you have $50,000 in a regular IRA that
you want to convert to a Roth IRA, your state and federal income tax
would be approximately $20,000. You would need to take the tax money
from another source not your IRA.If you must take it from your IRA to
convert, the calculation is much more difficult. It may take up to 10
years to recover. Obviously the conversion would not make sense for
someone in their 80s whereas it would almost always make sense for
someone in their 30s and 40s.
There is another nice advantage to the conversion process. You are not
required to convert all of your IRAs to a Roth IRA. This can be done
over a period of years to defer income tax and to spread the risk.
Finally there is a special provision for 2010 which permits you to
extend the gain over a two-year period. Nevertheless because of the
high spending by the President and Congress, it is inevitable that
income tax rates will increase. Therefore you probably want to make the
conversion right at the start of the tax year.
Many people are reluctant about paying taxes now for a future tax
advantage. That makes sense in most situations. Nevertheless, the
conversion of a Roth IRA means that you do not have to withdraw funds
from the account. If you believe you will have enough money to live on
from your other assets and pension, converting the Roth IRA can become
a simple dynasty trusts type saving mechanism that you can pass on to
future generations. Further, if the IRA is invested creatively,
including a self-directed IRA that invests in real estate, it has a
significant potential for long-term gain.
Key Tips:
- If you have one large IRA, divide it into
smaller IRAs. You can then convert one IRA at a time to a Roth
IRA.
- If you are not sure about converting, just
convert one small IRA. The 5 year wait for no penalty withdrawals
starts with your first Roth IRA. If one Roth is 5 years old and
you are 59 1/2 you can withdraw without penalty and tax free.
- Explore different types of assets in your IRA.
- Consider a self-directed IRA
The decision to convert should not be made without consulting your tax
attorney. Please call me at 856-665-2121
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| If you have a
question., call Ronald J. Cappuccio,
J.D.,
LL.M.(Tax) at (856)
665-2121 |
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