Roth Conversions
The income limit for those who can convert their retirement holdings from a traditional IRA to a Roth IRA (now applicable to anyone with a modified adjusted gross income of $100,000) disappears permanently in 2010. So high-net-worth folks, even Bill Gates, will be able to get a portion of their assets into a tax-free Roth account.
The elimination of the income limit is a way, particularly for high-net-worth clients, to get some of their assets into a tax-free Roth account. You should also know about the coming change now so that you can start saving money to pay the tax bill. Any dollars you convert in 2010, it’s going to be assumed, unless you elect otherwise on your tax return, that you’re not going to pay the income taxes due on this amount until you file your 2011 return, which happens in 2012, and your 2012 return which happens in 2013. So the IRS is giving taxpayers as many as three more years to pay the taxes on this. You would pay 50% when you pay your 2011 return and 50% of the tax bill when you file the 2012 return; but because that doesn’t happen until 2012 and 2013, you still have time between now and then to accumulate the money you’re going to need to pay the tax.
From 401(K) to Roth IRA
Another important change affecting retirement planning with Roths is that as of 2008 individuals will be allowed to transfer their 401(k) balances directly to a Roth IRA. With a Roth IRA, unlike a traditional IRA, contributions go in on an after-tax basis but grow tax-free. Plus, you never have to take required minimum distributions from a Roth IRA even after you’ve reached age 70 ½.
Sounds great….But Stop! Do not do any conversion until you get advice and help.
Congress extended the lower capital gains tax and dividend tax rate under the provision that retirement accounts could be converted to Roths in 2010. The tax from the Roth conversions would cover the lower tax receipts from the cap gains/dividend tax rate extension. In order to make up the tax receipts they will have to raise rates.
Look at the trap that is being set up….
So, you transfer money in 2010. Congress is slated to increase rates in 2011 just when you will be socked with 50% of conversion income.
It is expected tax rates will rise 10%, or more, in 2011 and after. That is why we have been pushing everyone to move money out of IRA’s/401Ks from 2004 until now when tax rates are lower. Even if you pull money out now and pay a 10% penalty tax… it will probably be less tax than if you wait until the 2011 rate increase.
As said many times before in this blog we help people, using the “Missed Fortune” program withdraw up to $ 60,000 per year from their retirement plans without tax.
Get on track right away…let’s see…2004-2007 is equal to $60,000 x 3 years = $180,000 that could have been withdrawn tax free. Here we go again…follow the discipline…or regret it later.