Donovan, Klimczak & Company CPAs

The latest developments and opportunities published out in the market place about these so called ROTH IRA conversions for 2010 and future tax years!

Just the other day I had finally allocated some time on a rainy Saturday afternoon to read some interesting information concerning Roth conversions as published in the July edition of the Ohio Society of Certified Public Accountants magazine named the "Voice”.

It occurred to me that even though the most recent Roth IRA conversion provisions passed in 2009 are an interesting topic of discussion amongst some CPA's, tax attorney's and other workers/taxpayers whom actually have more things to talk about then trying to save money on their current year's or future tax years income taxes, that there are a few new "nick names” out there in the market place for an opportunity to convert one's traditional IRA into the so called Roth IRA account.

When it comes to estate planning considerations, the taxpayer must realize that Roth IRA assets pass to one's heirs free of income tax and that the distributions can be stretched out much like traditional IRA's. Just an FYI, Roth IRA's can be better for the funding of a bypass or credit shelter trust than traditional IRAs. Also converting one's traditional IRA account reduces one's taxable estate by the tax paid upon conversion. There are a number of complicated factors to consider when converting to a Roth IRA account. Please refer to the attached table which presents some of the more important factors on whether to convert or not to convert one's IRA account.

There are unique opportunities that may offer some attractive scenarios for creating some Roth assets, which some professional advisors have developed these new nicknames as the "Sneaky Roth” and the "Proration End-Run Roth”.

The "Sneaky Roth” applies to someone who has all their retirement assets in a 401(k) plan account but is above the annual income AGI threshold to contribute annually to a Roth IRA account. These types of people can make an annual non-deductible contribution to a traditional IRA or SEP IRA, and then immediately convert that account to a Roth IRA. No income tax will be due, as the basis is equal to 100% of the market value. This opportunity is available under current tax law, however; it is probably not what was intended when the income limits were put in place for Roth contributions.

The "Proration End-Run” is for an individual currently working and participating in a 401(k) plan, but has IRA's with some basis from post-tax contributions. Normally, any basis in any one of an individual's IRA accounts must be prorated over all the IRA dollars in order to determine the non-taxable portion of the conversion. You cannot convert just the IRA that has basis, however; the pre-tax portion of the IRA's should be able to be rolled into the 401(k) plan account, leaving only the post-tax dollars. The conversion of the remaining IRA's to a Roth account will then be non-taxable, as the basis is 100% and no proration is needed.

Converting to a Roth IRA account usually involves paying some tax now that is not otherwise due until possibly quite some time into the future year, or even not until one's death when then the heirs are required to make withdrawals. Do not underestimate the hurdle that is created when we do not know what the future tax years will look like.

Unless Congress changes the current rules again, the income limitations on Roth conversions are gone for good. Please keep in mind that in order to do a Roth conversion, you do not have to convert an entire IRA account. If converting makes sense for you, maybe consider converting small amounts each year.

If you have any questions regarding this issue please contact us at DKC - Warfield & Company at 330.655.1395. Warfield & Companys CPAs, Ltd. is located at 581 Boston Mills Rd. #100, Hudson, Ohio 44236.


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