The Year 2010: IRA Changes
The Year 2010: Do You Convert Your IRA to a Roth IRA?
2010 will be a year for Roth IRA planning and taxpayer, including high income taxpayers, to convert traditional individual retirement accounts (“IRA”) into Roth IRAs.
2010 will be a popular year to convert to a Traditional IRA because barriers to conversion have been lifter. Prior to 2010, there was an income limitation preventing taxpayers from converting to a Roth if their modified adjusted gross income exceeded $100,000. Under the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”), aka PL 109-222 (May 17, 2006), the income limitation was removed beginning in 2010. Additionally, if taxpayers believe income tax rates will increase, sooner may be better timing for conversions, since converting to a Roth incurs a current income tax liability.
Upon a Roth conversion, the entire pretax balance of Traditional IRA (usually the entire IRA balance) will be subject to income tax. Taxpayers converting in 2010 can split the income tax liability equally and report half in 2011 and the balance in 2012, with no income reportable in 2010. If taxpayer’s think Congress will raise individual income tax rates in 2011 and 2012, taxpayers can elect to report all conversion income in 2010.
What You May Not Know About Roth IRA Conversions
A Roth conversion raises asset protection issues, beneficiary designation issues and estate tax apportionment issues.
When an individual moves funds from a qualified plan to an IRA, they leave the asset protection safe haven of an ERISA protected plan. In some states the individual may still have creditor protection; however, in other states, the protection may be diminished.
However, the laws of many states are not clears as to the asset protection afforded when one rolls over from an ERISA plan to an IRA and subsequently to a Roth IRA
The Preparation of proper beneficiary designations is critical to ensure separate shares and to maximize the opportunity for post-death stretch out.
An IRA left outright to a beneficiary has limited asset protection in many jurisdictions whereas an IRA left in a properly drafted trust provides the beneficiary with additional asset protection.
Generally, estate taxes should be apportioned away from Roth IRAs to allow the Roth IRA to continue to grow on an income tax-free basis.
Make sure that a client’s durable power of attorney will provide the attorney-in-fact the right to make any and all tax elections including an election to recharacterize the Roth IRA.
Accordingly, both a client’s IRA trust and last will and testament should be modified to provide for the recharacterization decision.
P.S. Also, don’t miss our new workshop: “Don’t Go Broke in a Nursing Home”, on November 17, 2009 at 1:30 PM and 6:30 PM.
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Anthony B. Ferraro
The Law Offices of Anthony B. Ferraro, LLC
The Estate & Trust, Elder and Asset Protection Law Firm
Columbia Centre I
5600 N. River Road, Suite 764
Rosemont, IL 60018
PH (847) 292-1220
FAX (847) 292-1221
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