The Roth IRA, originally established as an attractive retirement savings vehicle for middle-income Americans, has been out of reach to high-income earners until now. As of 2010, investors of any income can convert retirement plans and IRAs to Roth IRAs. This means that even high earners who convert to Roth IRAs will benefit from the tax-free withdrawal benefits the Roth IRA offers.
What To Consider
There is ample reason to consider a Roth conversion and to discuss this option with your own tax advisor.* Roth IRAs present certain advantages to eligible investors. The Roth affords eligible investors tax-free withdrawals, tax-free growth, no minimum distribution requirements, and estate planning benefits.
So now that anyone can convert, does it make sense to convert your pre-tax retirement plans to a Roth IRA? Depending on your situation, it might.
Investors converting to Roth IRAs pay income tax on the money for the year of conversion—essentially locking in today’s historically low tax rates—for the benefit of potentially tax-free distributions in the future. This can
help you create a pool of tax-free assets that may provide flexibility in managing your taxes in retirement.
Another attraction of the Roth conversion for affluent investors is that it can reduce the size of one’s taxable estate. The account can be kept intact and passed on to your heirs income-tax free.
Questions to Ask
Some things to discuss with your tax advisor: do you have assets outside of the IRA to pay the taxes that will be due? It rarely makes sense to withdraw assets from the IRA to cover that payment.
Also, how long before you’ll need to use the money? Each Roth conversion has a five-year waiting period, in addition to requiring that you attain age 59H before the earnings are eligible for tax-free withdrawals.
It is important to understand what these changes mean in your own financial situation. While the conversion from a traditional IRA to a Roth IRA is now open to anyone regardless of income or filing status, making new contributions to a Roth IRA continues to be capped by income.
The income threshold for a full contribution for tax years 2011 and 2012 is $107,000 for single persons and $169,000 for married persons filing jointly. For a reduced contribution, the income threshold is $122,000 and $179,000, respectively; however, the benefits phase out at even lower income levels. (A full contribution is a maximum of $5,000 for those under 50 and $6,000 for those 50 or older under “catch-up” provisions.) Note that contributions can still be made for tax year 2011, up to your tax filing date for your 2011 taxes.
Unlike a traditional IRA that requires withdrawals beginning at age 70H, funds may grow tax-deferred in the Roth IRA indefinitely or be withdrawn on your own schedule.
There are many factors to think through before you convert an IRA to a Roth IRA or invest in a Roth, and investors are advised to consult with a financial advisor to evaluate this investment option. Work with your advisor to learn more and see if a Roth IRA is right for you.
It just might be! -CL-
* Wells Fargo Advisors does not render legal, accounting, or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE.
This article was written by Wells Fargo Advisors and provided courtesy of Joe Kienle III, Financial Advisor and Vice President - Investments, 17 N. High St., West Chester. 610-436-7791.