The Tax Game
The new tax law has a number of advantages that create opportunities.
ALAN ABRAMS
Special to The Jewish News
S
everal new provi-
sions in the
revised tax laws
which take effect
in 1998 may contain hid-
den bonanzas for older
Americans, according to
local certified financial
planners.
This could be especially
true for seniors who are
dependent upon IRAs for
their retirement income, or
for people who want to
leave sizable assets to their
heirs.
The Taxpayers Relief
Act of 1997 effectively
rewrote the book on estate
planning.
Congress, in its biparti-
san desire to balance the
budget now and not worry
about the consequences
until future decades, corn-
promised on the provision
for a new IRA. It opens a
door for senior citizens.
"People are living longer, they're
going to be on a 30-year vacation,"
said David A. Jaffa, a Farmington
Hills certified financial planner.
Using the Roth IRA "could be
considered part of inheritance plan-
ning," said Jaffa. "If you are retired
and have no income, it could be for
your children."
If you are an older person with a
large IRA, you have a big decision to
make right now. Should you convert
to the new Roth IRA, you could
save a bundle for yourself or your
heirs.
Named after Delaware's Senator
William V. Roth, Jr. who created it,
the concept of the Roth IRA is sim-
ple: you pay your income tax going
in, rather than going out.
12/26
1997
L20
Lions come out — providing you are
Says Audrey Pearl, a certified
older than 59 1/2 and the Roth IRA
financial planner in Southfield, "A
is at least five years old.
Roth IRA is an after-tax IRA in
But that's a good reason why
which you're putting money
decisions like this one should
away. Why would that be
Audrey
Pearl
always be made as part of an
good? I could have a 401(k)
and
Allan
estate planning package.
retirement plan. I could have
Zumberg
plan
So are you better off pay-
an IRA before taxes."
a mutual
ing taxes on your IRA now or
Her answer is not paying
client's finan- later? To begin with, you
taxes on money you put in
cial strategy.
need to know whether you
after paying the initial tax.
can even qualify.
If the early payment plan
You can convert to a Roth IRA
works to your advantage, here's a
only if your adjusted gross income
capsule of what you need to know.
does not exceed $100,000 in the year
To convert a presently existing
in which you switch. One major
IRA to a Roth IRA, you must declare
the entire balance in the existing IRA drawback is that married people fil-
ing tax returns separately cannot
as taxable income and pay tax on it.
convert, according to an analysis of
From then on, the IRA is totally tax-
the Roth IRA by Forbes magazine
free while it compounds. That can be
and a summary of the 1997 tax law.
especially beneficial when distribu-
si If you converted to a
x Roth IRA in 1998, you
would spread the converted
..t.-income over four years.
Thus, if you converted
$200,000 next year, you'd
be adding $50,000 to your
yearly income from 1998
through 2001. The amount
you are not converting
doesn't count towards your
$100,000 income level.
The $100,000 ceiling
isn't as difficult as it
appears, especially for
retired folks. For example,
in calculating this income,
you do not count municipal
bond interest or unrealized
capital gains.
But converting to a Roth
isn't a good idea if your tax
bracket is higher now than
you or your heirs' tax brack-
et is likely to be when the
IRA money is spent.
If your main goal is to
accumulate as much as you
can in the account and
leave it to your heirs, con-
version makes sense. That's
because, unlike traditional IRAs,
Roths require no minimum distribu-
tion each year during the life of the
IRA owner and, upon his death, the
life of his spouse.
These tax advantages for senior
citizens were not intended to exist by
the solons who drafted the act.
However, it "presents a marvelous
opportunity, because the government
will find out about it, and they are
going to change it," said Audrey
Pearl.
Pearl is instituting an analysis of
every IRA handled in her office to
determine whether a rollover to a
Roth IRA would be advantageous to
her clients.
But Pearl is quick to point out
that the Roth IRA is only one of the
many changes in the tax laws that