Forget the Income? Traditional to Roth Conversions
Days are counting down in 2009, so some decisions should be made now. Those decisions will affect your retirement income in future years. One of the most talked tax decisions is the Roth IRA.
We already know that when a Roth earns income, it's tax free. And when "qualified distributions" are made from a Roth IRA, they're also tax free.
So should I convert my IRA to a Roth IRA?
For 2009, if your "modified adjusted gross income," as reported on your Federal income tax return, is $100,000 or less, you may convert from a traditional IRA to a Roth IRA. You escape the 10% penalty, for early withdrawal from a traditional IRA, if you meet the modified adjusted gross income threshold. Of course, if your modified adjusted gross income is greater than $100,000 then you will incur the penalty.
But in 2010, a change in the law allows those individuals with modified adjusted gross income greater than $100,000 to convert to a Roth IRA.
Is this a wise move?
That depends. Although you escape the premature distribution tax of 10%, you're still required to report the traditional IRA as income on your income tax return. So your decision is whether to pay now rather than later.
If you believe that Federal taxes will increase in coming years, then, yes, maybe you should pay the tax now rather than later.
Also, regular IRAs have a required minimum distribution rule; Roth IRAs do not. (Post-death minimum distribution rules apply to beneficiaries who inherit Roth IRAs).
What about Roth Distributions?
Roth IRA distributions are tax-free if the distribution is a "qualified distribution." So, if you meet the rules, you may get a tax break through tax-free Roth IRA distributions.
What if I'm a high-income taxpayer for 2009?
Then consider making a nondeductible IRA contribution this year so you can take advantage of the rollover next year.
Any other thoughts on the conversion?
There are a few twists and turns if you decide to do the conversion during 2010. For example, you may elect to treat the conversion as occurring half in 2011 and half in 2012.
What should I do before I make the final decision?
Find competent advice. This area, like many areas of the tax law, are wrought with potholes, penalties and interest; therefore, get the best advice before you make the decision to convert!
Anything else?
The questions and answers here are not meant as legal or tax advice for your situation. Therefore, you should not act based on the information on this website, rather you should seek competent tax advice.
If you would like more information about Pennsylvania Elder Law, Business Law or Tax Law, please contact an experienced Pennsylvania Lawyer who is also a Certified Public Accountant (CPA) via email or phone us at (724) 216.6551 at our Greensburg, Pennsylvania office.
The Iezzi Law Office serves clients primarily in southwestern Pennsylvania, including Greensburg, Pittsburgh, Delmont, Monroeville, Latrobe, Irwin, Uniontown, Connellsville, Indiana, Somerset, including the following counties: Westmoreland, Allegheny, Erie, Fayette, Indiana, and Somerset; additionally, we also advise clients in other states and some foreign countries.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
