Coming off of a painful financial period where a majority of Connecticut residents saw their retirement savings take a major hit, some good news may have arrived with the start of the New Year.
A unique opportunity became available on Jan. 1 with a new tax law that makes it possible — for the first time — for people of higher incomes to have access to Roth IRAs. This significant change could bring major benefits to those who take advantage of converting to a Roth IRA.
The big question is this: Is a Roth IRA conversion/rollover right for you?
Investing assets in a Roth IRA could offer additional benefits that are not found with traditional IRAs, including the tax-free, compound growth of assets and earnings, tax-free distributions (after five years if Roth conversion occurs), and no required minimum distributions.
Additionally, under this new law, contributions are permitted after age 70½ for those who have earned income. And for people with a modified adjusted gross income of more than $100,000, they can take advantage of Roth IRAs as well.
This tax law change comes at a good time for investors who have seen the value of their retirement assets retreat with the recession. If those assets are beginning to rebound, converting them now could mean a lower tax impact than if converted in the future. The relatively low income tax rates today (as opposed to higher rates that are anticipated in the future) may offer immediate tax advantages to those who decide to convert to a Roth IRA, now that the option is available.
There are a number of factors to consider when making the decision about converting assets to a Roth IRA. Answering “yes” to the questions below could mean a lucrative long-range opportunity. The questions are:
Would you like to extend the tax-free growth potential of a Roth IRA to your heirs?
Do you have the ability to pay the taxes resulting from the conversion from dollars independent of the converted funds?
Do you want tax-free distributions in retirement?
Do you believe you will be in a higher income tax bracket when those distributions begin?
Can you do without access to the money for at least five years?
Do you have losses for the tax year to offset the ordinary income created by the conversion?
Again, answering “yes” to all or even many of these questions could mean a good chance for future investment growth through channels created solely by Roth IRAs.
What’s more, the IRS is offering a rather unique tax opportunity this year to encourage those who may want to convert. For one-time only, a conversion to a Roth IRA this year means a person can pay the taxes owed in two separate installments — half in 2011 and half in 2012.
As with many issues, the decision of whether or not to convert to a Roth IRA is not a one-size-fits-all solution, and people with traditional IRAs still need to consider a variety of issues before making the decision to convert.
Red flags regarding a conversion include a number of factors. They include: the income tax rate will stay the same or drop in retirement; not enough cash in a taxable account to pay the taxes due on the conversion; or the IRA assets will be donated to a charity. In these cases, the conversion may not necessarily work for you.
Whether or not conversion is the correct decision is up to the individual investor.
However, this new law does open up a door for possible future investment that was previously closed, and could lead to major investment benefits both today and into the future.
After a difficult time of wondering when those valuable future investments will finally turn around, this opportunity may come as welcome news to many Connecticut residents.
Mary Hoyt, CPA, is a partner with BlumShapiro, an accounting, tax and business consulting firm based in West Hartford and Shelton. She specializes in estate and trust planning.
