The new law allows traditional IRAs to be converted to ROTH IRAs without regard to the old $100,000 modified AGI limitation starting in 2010. So, we may see many taxpayers who make such conversions. A conversion will be subject to income tax, which could be enormous; but NOT the 10% penalty by using exception 12 on the form 5329. For 2010 the tax could be elected to be paid in 2011 and 2012. But NOT making the conversion would allow the traditional IRA's to be withdrawn over many years by withdrawing only small amounts or required minimum distributions. And to avoid penalties on ROTH IRA distributions the taxpayer must wait 5 years after the conversion and reach age 59 1/2 before making distributions. Withdrawing funds for such conversion can cause the taxpayer's Medicare premiums to go through the roof. They may be able to contact the Social Security Administration and have the premiums reduced because the conversion was an unusual event. For many taxpayers their income will go down after they retire reducing the benefit of making such a conversion. And what would stop CONGRESS from taxing ROTH IRA distributions in the future? Social Security benefits were once non-taxable. It would be much better if taxpayers would invest in ROTH IRAs WHEN they are young, but NONE of my clients will do so. I would appreciate any thoughts on the issue.
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A couple quick thoughts...
If someone will not need distributions and wants to avoid the RMDs from his current traditional IRA, he could convert part or all of it to a ROTH.
If someone is using his IRA as part of his estate planning, converting part or all of it to a ROTH gives his beneficiaries income that's not taxable, meaning they don't have to sell part of their new inheritance to pay the taxes.
If someone is still working, he can continue contributing to a ROTH. (Don't remember if he can continue contributing to a traditional IRA indefinitely.)
If someone expects tax rates to increase (and don't we all, especially for the top two brackets) paying tax for 2010 might save future taxes. Or, spreading the taxes over two years might make it possible to handle. Or, maybe someone expects higher medical bills in the future and wants to convert now to pay taxes earlier while he still has income.
If someone's traditional IRA is still depressed after years of equity losses, converting while at a low point could save taxes later. This assumes he expects his account to grow again.
You get the idea. No one size fits all. As many different ways to save for retirement as there are people. -
No 10% penalty for conversion before age 59 1/2 that I read, correct me if I'm wrong.Originally posted by dyne View Post
One reason to convert. If your traditional IRA has loss lots of money during the last few years, and you expect it to go back up. Then a conversion to a ROTH IRA would be beneficial.Comment
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Thank You Lion. You are correct. There is NO 10% penalty for amounts converted. I corrected my post.Comment
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Gene
Actually, Gene caught that. I thought about it but was too lazy to look it up on a holiday, and too memory-challenged any day.
Conversion is something to mention to your clients that have traditional IRAs, but as you say, nothing to push someone into doing, since everyone's situations will be unique.Comment
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Gene V: Thank you for correcting me about the 10% penalty.
Best wisheslComment
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But watch your state laws. To date Wisconsin has not adopted the allowable Roth Conversion and will still impose the the 3.333% early withdrawal penalty.Originally posted by Gene V View PostComment
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