Roth Conversions

Roth Conversions : 

Roth Conversions Peri Ann Aptaker, Esq., CPA/PFS, CFP®, CBA www.KLRWealth.com

Historical Perspective : 

Roth IRA’s came into the law in 1997 Under current law, single taxpayers with MAGI in excess of $116,000 and married taxpayers filing jointly with MAGI in excess of $169,000 cannot make contributions to Roth’s. Individuals and MFJ’s with MAGI in excess of $100,000 currently cannot convert traditional IRA’s to a Roth. MFS cannot convert at all. Historical Perspective

2010 Opportunity : 

Effective 1/1/10 all taxpayers are allowed to convert their traditional IRA’s to Roth IRA’s, regardless of income or filing status. Contrary to traditional tax wisdom – paying the tax today may be more beneficial to the client. Can result in an increase in overall retirement assets available. Can result in larger inheritance to beneficiaries. Can provide a tax-free source of income. 2010 Opportunity

Conversions in 2010 and Beyond : 

Ordinary income is recognized on conversion. Some traditional IRA’s may have basis – check for Form 8606. If convert in 2010 – conversion income automatically deferred equally over 2011 and 2012. Tax rates in effect in those years will apply. Can elect to opt out of this treatment and pay tax hit in 2010. May be advantageous if taxpayer believes rates will increase in 2011 and 2012. Conversions in 2010 and Beyond

Conversion Factors : 

Taxpayer’s current and estimated marginal Federal and state rates Basis in Traditional IRA’s, charitable contribution carryovers, and other tax attributes that will affect the ultimate tax paid on conversion Estimated Federal and state Estate tax liability Current and future cash flow needs Estate planning goals Life expectancy and current health of IRA owner Conversion Factors

Conversion Factors : 

Anticipated rates of return on all assets (both IRA and non-IRA assets) Income needs during retirement years – more or less than traditional RMD’s Life expectancy of the beneficiaries State law for liability protection Taxpayer’s belief on where Congress will go with income, estate, and gift tax legislation. Conversion Factors

Three Stages of Analysis : 

Three Stages of Analysis

Stage 1- Conversion to 70 ½ : 

Distributions are not required from traditional or Roth IRA’s Accumulation of wealth is equal during this phase in retirement accounts Non-IRA money likely source of conversion tax Need sufficient NON-IRA money to cover tax and living expenses Stage 1- Conversion to 70 ½

Stage 2 – 70 ½ to Death of Participant : 

No distributions are required from Roth IRA’s Distributions are mandatory from traditional IRA’s Benefits of conversion begin to reverse disadvantage of paying conversion tax in Stage 1 Assumes do not need IRA money during this period, or need less than RMD’s for traditional IRA’s. Stage 2 – 70 ½ to Death of Participant

Stage 3 – Death of Participant to Death of Beneficiary : 

Beneficiary must make RMD’s during his/her lifetime on both inherited traditional and Roth IRA’s. Income tax is due on traditional RMD’s. NO income tax is due on Roth RMD’s. More money available to beneficiary due to absence of income tax on Roth RMD’s. Stage 3 – Death of Participant to Death of Beneficiary

When is it Beneficial to Convert? : 

When is it Beneficial to Convert?

Traditional IRA’s with Basis : 

All IRA’s must be aggregated for basis allocation Pro-rata share of basis in the aggregate amount of the IRA’s must be allocated to amount converted Prevents taxpayer’s from “picking and choosing” IRA’s with basis for conversion Partial conversions can be done Traditional IRA’s with Basis

Order of Roth Distributions : 

Roth contributions are distributed first, tax-free Conversion contributions are distributed next, tax-free Earnings are distributed last, tax-free (subject to qualified distribution and excise tax requirements and holding periods). Order of Roth Distributions

5 Year Holding Period : 

Income tax deferred if Roth has been held for 5 years Requirement to hold converted Roth for full 5 years to be excluded from excise tax (10%) Exceptions for 10% excise tax applies 5 Year Holding Period

Unwinding a Conversion : 

Special “re-characterization rule” allows the IRA owner to take a second look or change their mind on the decision to convert before the taxpayer files his or her return (includes extensions). Rule allows IRA to be “re-characterized” as a traditional IRA. May be warranted if stock market plunges after conversion. Use a new Roth IRA account to permit re-characterization Must wait until later of next tax year or 30 days before conversion permitted again Unwinding a Conversion

Tactics : 

Use same custodian or trustee to trustee transfer – do not take funds personally Avoid 60 day rollover rules this way Make sure beneficiary designations allow for “stretch” benefits Tactics

Information Needed for Analysis : 

Date of birth of participant; spouse; beneficiaries Amount of retirement assets Amount of non-retirement assets Amount of other estate assets Health of participant and spouse – life expectancy Expected growth rate of investments Amount of retirement income needed Estimated tax rates today and in the future Charitable intent State law – creditor protection rules Information Needed for Analysis

Slide 18: 

Peri Ann Aptaker, Esq., CPA/PFS, CFP®, CBA Managing Director KLR Wealth Management, LLC 951 North Main Street Providence, RI 02904 401-274-2001 Paptaker@KLRWealth.com