Donovan, Klimczak & Company CPAs


ROTH IRA Conversion

To "Roll or not to Roll over" a traditional IRA is the question for taxpayers to consider in the tax year 2009 and or future years?

There are obvious reasons to convert a traditional IRA to a ROTH IRA, & there are some reasons to be aware of that may now or in the future not make as much sense to convert. The following paragraphs outline for the taxpayer some of the advantages & disadvantages of making an IRA conversion;

Some of the advantages of an IRA conversion are as follows;
  1. Roth IRA distributions in the future are tax free if they are "qualified distributions” that is , if they are made (1) after the 5 tax year period that begins with the first tax year for which the taxpayer made a contribution to a ROTH IRA, (2) when the account holder is 59 ½ years of age or older, (3) on account of death, disability, or (4) the purchase of a home by a qualified first-time homebuyer (limited to $10,000).
  2. Regular IRAs (not Roth's) are subject to the lifetime required minimum distribution (RMD) rules that generally require annual minimum distributions when they obtain the age of 70 and ½ .
  3. The current tax rates in place are lower then the proposed tax rates that may be in effect in the tax year 2010 and later. In addition with stock market values lower than in the past, account values are at a much lower amount now when one is considering converting their traditional IRA to a Roth IRA.
  4. Effective with IRA conversions done in the tax year 2010, the taxpayer may elect to defer the income recognition of the IRA conversion until tax years 2011 and 2012.
Some of the disadvantages of an IRA conversion are as follows;
  1. Unless the account holder of the traditional IRA can not afford to pay the income taxes as a result of the conversion to a Roth IRA from non-retirement account assets, the taxpayer may have a smaller build up of tax free earnings from the depleted or reduced traditional retirement account.
  2. The federal income tax rates in effect for the tax year 2009 are expected to rise next year to the pre-2001 levels. This means the top four brackets could reach 39.6%, 36%, 31% and 28%. If the account holder holds off taking advantage of the new deferral rules for tax year 2010, they may experience a larger federal income tax conversion bill when they convert.
  3. If the account holder expects to be in a much lower tax bracket when they



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