Roth IRA conversions became the hot topic in 2010 when Congress lifted the income limitation allowing all taxpayers to take advantage of converting their Traditional IRA’s to Roth IRA’s. At the time, the lower Bush era tax rates were in effect and set to expire at the end of 2010. Subsequently, President Obama extended the lower rates for 2011 and 2012, allowing many taxpayers to continue to take the opportunity with the lower rates.
Once a taxpayer converts their Traditional IRA to a Roth IRA, the amount converted is includable in gross income in the year converted. An important factor is this is not an all or nothing opportunity, you can convert a portion of your IRA to Roth and use the tax brackets to your advantage. Another item to note is that the IRS gives you an undo opportunity. If you convert your IRA to Roth in 2013, you have until October 15, 2014 to undo the conversion and recharaterize the Roth back to a traditional IRA. This is important if the market would go down or for some reason you do not want to convert and pay the tax this gives you some additional flexibility.
Now 2013 is upon us and the tax brackets for individuals over $400,000 (single) or $450,000 (married) have increased from 35% to 39.6%. Additionally, there are two new taxes enacted under President Obama’s Patent Protection and Affordable Care Act. A new 3.8% surtax on net investment income and 0.9% surtax on earned income.
Now the question is if Roth IRA conversions still make sense. The answer is it depends; every individual’s situation is different. Have you recently retired, are you self-employed and you incurred a substantial loss due to the business starting up or for some other reason, or does your income fluctuate from year to year? If you answered yes to any of these questions, there may be an opportunity to consider a Roth IRA conversion. If none the situations above apply to you, again every situation is unique, and should be examined to determine if this strategy fits your overall estate plan.
If you have questions or need assistance in evaluating if a Roth conversion would fit your situation, please contact Anders or your tax advisor.All Insights