A ROTH IRA conversion opportunity arises out of the 2005 Tax Increase
Protection and Reconciliation Act (TIPRA), where, under a provision of
that law, starting in 2010 and continuing thereafter, the prior $100,000
income level for converting a Traditional IRA to a ROTH IRA expires. The
result is that persons at any income level will be able to convert their
IRAs to a ROTH IRA.
What makes this special is that one can spread the due
taxes over the subsequent two-year period with a 50-50 split through 2011
and 2012...if you claim it in 2010. If the law is not changed one can do
the Conversion even in years after 2010.
As with any tax planning strategy, the individual
circumstances of any given taxpayer must be taken into consideration.
For example, when one needs retirement income, it is
appropriate to carefully also look at the number of years from a
conversion to age 70½, [the time after which Traditional IRAs must begin
Required Minimum Distributions (RMDs)]. Also, the period from age 70½ to
life-expectancy (death) must be looked at because when you convert
you have to pay taxes on the converted sum.
Circumstances can also influence the conversion
decision for persons with net operating loss carryovers; capital
contribution carryovers; changes in income tax brackets due to changes in
income that often happen at retirement.
Looking at these conversion specifics is largely a
"numbers game", with the purpose being to get the best net,
after-tax-benefit, for participants and beneficiaries.
Another example is that if one converts in 2010 you can
defer paying the tax by bringing the income into 2011 and 2012, but you
must also look at what your income tax bracket will be in those forward
years and be certain to pick the better time to do a conversion.
Many feel that under the Obama Administration income
tax rates might significantly increase, so if you defer your conversion
income into 2011 and 2012 you may find that your tax rates are higher then
if you either paid them up front in 2010 or you waited until some years
later when tax rates may be lower.
The best course is to look at converting in light of
the above issues, as well as multi-generational and other estate planning
conditions specific to your personal situation. Clearly, one shoe does not
fit all feet!
