Is there a Roth IRA in your future?
s
oon everyone will be able to enjoy the
tax-free benefits of a Roth IRA, regardless
of annual income. Historically, the Roth
IRA has had strict eligibility requirements
based on income levels, which limited investor
participation in this valuable retirement
savings vehicle. With the new Roth conversion
provisions, that's all set to change.
Beginning in 2010, the $100,000 modified
adjusted gross income ceiling will be eliminated
for conversions from a traditional IRA (and some
employer retirement plans)
to a Roth IRA.
Tax-free Roth IRA
benefits extended to
investors with higher
incomes
Like a traditional IRA,
the Roth IRA offers tax-
deferred growth — plus,
these additional retirement
benefits:
• No required minimum
distributions (RMDs)
for account holders, and
potentially for spousal
beneficiaries
• The ability to contribute
past age 701/2 for
individuals with earned
income
• Qualified tax-free
distributions'
For example, let's say your IRA is worth
$400,000:
• $360,000 (90%) in pre-tax assets
• $40,000 (10%) in after-tax assets
If you convert 25% or $100,000 of the total
amount to a Roth IRA, the conversion amount
will be taxed as follows:
• $90,000 (90%) converts and is taxed
• $10,000 (10%) converts tax-free
If you have multiple IRA accounts (traditional
IRA, SEP-IRA, SIMPLE IRA or rollover
IRA), this ratio will
be based on the
combined pre-tax and
after-tax assets from
all of your IRAs.
Robert Levy, Senio r Vice-President-Invest -
Stretch tax liability over two
ments
years
You will have to pay income tax on the taxable
portion of the assets you convert to a Roth IRA.
However, for amounts converted to a Roth IRA
in 2010, tax liability can be stretched over the
next two tax years by paying 50% in the 2011 tax
year and 50% in the 2012 tax year. Check with
your tax advisor for additional details on whether
or not the conversion strategy makes sense for
you.
Important pro-rata rule
If you convert from a traditional IRA, SEP-IRA,
SIMPLE IRA or rollover IRA that contain both
pre-tax and after-tax assets, you should be aware
of the pro-rata rule. The taxable portion of your
conversion will be determined by the ratio of the
pre-tax earnings to the after-tax contributions.
How the Roth
conversion strategy
works
Before the
•
Roth conversion
— Beginning in 2007,
Tom, age 35, began
funding a traditional
IRA with non-
deductible after-tax
contributions. He
contributed $4,000 in
2007, then $5,000 in
each of the following
three years: 2008,
2009 and 2010, for
a total of $19,000.
By 2010, Tom's IRA
grows to $23,000
($4,000 in gains).
• Tax treatment at conversion — Tom converts the
traditional IRA into a Roth IRA in 2010. He
owes no taxes on the $19,000 in contributions
because they were made with after-tax dollars.
He owes $1,3202 in income tax on the $4,000
gain. Tom can split the $1,320 tax bill on the
$4,000 in gains over the next two years.
• After the Roth conversion — After Tom converts
the $23,000 to a Roth IRA, it continues to
grow tax-free. If Tom keeps the money in the
Roth IRA for 20 years and earns an 8% annual
growth rate, the assets could grow to $107,000.
He will owe no taxes on the distributions. Also,
there are no required minimum distributions
(RMDs). 3
To convert or not: some factors to consider
• If you convert to a Roth IRA, you will need
to pay taxes on the taxable portion of the
conversion amount.
• If you're not ready to convert in 2010, you can
sill convert to a Roth at a later time. Or, you
may decide that converting only a portion of
your assets is best for your situation.
• If you expect to be in a higher income tax
bracket in retirement, converting to a Roth
IRA now may help offset your tax burden later.
• The more time you have until retirement, the
greater potential for tax-free growth from a
Roth IRA.
Is a conversion right for you?
Contact us today to discuss the Roth conversion.
Together, we can evaluate whether a Roth
conversion makes sense as part of your overall
financial plan.
Rob Levy is a Wealth Advisor and Senior Vice
President — Investments at UBS Financial Services
in Farmington Hills. For more information,
he can be contacted at (248) 737-5477 or robert.
levy@ubs.com.
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employees provide legal or tax advice. You must
consult with your tax and/or legal advisors regarding
your personal circumstances.
The information contained herein is based on
sources believed to be reliable, but its accuracy is
not guaranteed. UBS Financial Services Inc. does
not provide tax, legal or accounting advice. Please
contact your tax advisor regarding the suitability of
tax-exempt investments in your por t folio and your
accounting advisor to determine the appropriate
accounting treatment. Income from municipal bonds
may be subject to state and local taxes as well as the
Alternative Minimum Tax. Call features may exist
that can impact yield. If sold prior to maturity,
investments in municipal securities are subject to
gains/losses based on the level of interest rates, market
conditions and credit quality of the issuer.
1. Tax-free distributions are allowed if the assets withdrawn have been held in a Roth IRA or Roth 401(k) for a five "taxable year" period, beginning the year for which the
first Roth contribution was made and the account holder is at least age 59 1 /2, disabled or deceased. For Roth IRAs only, tax-free distributions are also allowed to make a first-
time home purchase (lifetime limit of $10,000 per taxpayer).
2. Tax-deferred earnings taxed at ordinary income tax rate. Assuming a 33% income tax rate: $4,000 X 33% = $1,320 in taxes due.
3. No required minimum distributions (RMDs) for the account holder or spousal beneficiaries who elect to treat the Roth IRA as their own. RMDs required for non-spouse
beneficiary. Generally, tax-free RMDs for a non-spouse beneficiary can be taken within five years of death or stretched over his/her life expectancy.
This article has been written and provided by UBS Financial Services Inc. for use by its Financial Advisors.
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