Roth IRA Conversions: Benefits and Planning Opportunities

The main point is that contributing to a Roth IRA allows your money to grow tax-free, unlike a traditional IRA where you have to pay taxes when you take the money out. Converting to a Roth IRA can be a good idea for some people because it means you won’t have to pay taxes on your withdrawals in the future. The traditional IRA and the Roth IRA have the same annual contribution limits. For 2009, an individual under 50 years of age can contribute up to $5,000 per year, while an individual age 50 years and over can contribute up to $6,000 per year. However, not all taxpayers qualify to make contributions to a Roth IRA. For single taxpayers, the amount that may be contributed to a Roth IRA is phased out once their income is $105,000, and no contributions are allowed once their income is $120,000. For married taxpayers, the phase-out begins when their combined income reaches $166,000, and no contributions are allowed if their combined income exceeds $176,000.

A big difference between the traditional IRA and the Roth IRA is the distribution requirements. For a traditional IRA, the owner must start taking distributions from the IRA by April 1st of the year after they turn 70.5. The amount of the required minimum distribution is determined based on the owner’s life expectancy. However, a Roth IRA has no required minimum distributions during the owner’s lifetime. This means the Roth IRA can continue to grow, tax-free, over the owner’s lifetime, providing for potential substantial growth.

Another benefit of a Roth IRA is the potential estate tax savings. Using a Roth IRA can result in a lower estate tax liability for those with a taxable estate, because the income tax paid on the contributions to the Roth IRA will reduce the owner’s gross estate. If you have a traditional IRA, you can convert it to a Roth IRA if your income is under $100,000. This rule will change in 2010, so high-income people can also do the conversion. If you have a retirement plan through your job, like a 401(k), you can also roll it over into a Roth IRA. When you do this, the amount you move will be added to your income and you will have to pay taxes on it. But starting in 2010, you can spread out the taxes over two years instead of paying it all at once. If you think your taxes will go up in the next two years, you may want to pay all the taxes right away instead. If you want to change your traditional IRA to a Roth IRA, you may have to pay a penalty if you use money from your IRA to cover the taxes. It’s best to use money from outside the IRA to pay the taxes. You can also change your mind and switch back to a traditional IRA within a certain time frame. This can be helpful in getting the most benefit from the conversion. It’s a good idea to convert to a Roth IRA now because tax rates are likely to go up in the future, so it’s better to pay taxes at the current lower rate. Also, if you convert now, you’ll pay less taxes because your retirement account balance has dropped due to the market downturn. And if you don’t plan on using the IRA during retirement, converting to a Roth IRA means your descendants won’t have to take any required distributions, letting the IRA continue to grow tax-free for a longer time. The easiest way to do a Roth conversion is to transfer your entire IRA into a Roth IRA all at once. If the value of the Roth IRA goes down before you file your taxes, you can change it back to a traditional IRA and wait 30 days before trying the conversion again in the next year. This can help you pay less in taxes and delay paying them for another year. If you have a traditional IRA, you can convert it to a Roth IRA by splitting it into multiple accounts and then converting them to Roth IRAs one by one. You can invest each Roth IRA differently. At the end of the year, you can look at the accounts and decide to change some of them back to traditional IRAs if their value has gone down. This can help you lower your taxes. When you die, the people who inherit your Roth IRA won’t have to pay taxes on the money they get, but people who inherit a traditional IRA will have to pay taxes. If you have an IRA and want to leave it to someone when you pass away, it’s important to consider who the beneficiary will be. If you leave it to an individual, they might take out more money than they need, which could waste the opportunity for the IRA to grow tax-free over many years.

To avoid this, you can leave the IRA to a special type of trust called a see through trust. This trust allows the trustee to decide if the beneficiary should take out more than the minimum required amount each year. The trust has to meet certain legal requirements, but if it does, the IRA can continue to grow tax-free over a longer period, benefiting the person who inherits it.

So, if you want to make sure your IRA keeps growing and provides as much benefit as possible to your loved ones, consider leaving it to a see through trust. A trust needs to have identifiable beneficiaries in order to qualify as a see-through trust. This is important because the minimum distributions from the trust are based on the life expectancy of the oldest beneficiary. If the oldest beneficiary cannot be identified, the entire IRA balance will have to be distributed. There are different types of see-through trusts, such as conduit trusts, which pass IRA distributions on to the beneficiary, and accumulation trusts, which can hold the distributions until the beneficiary reaches a certain age. Keeping funds in an IRA throughout the beneficiary’s lifetime can help them grow tax-free and provide a valuable estate planning opportunity. If you have a traditional IRA, it might be a good idea to consider converting it to a Roth IRA. This could save you money on taxes and help with estate planning. Just make sure to follow the rules carefully to avoid any negative tax consequences. The Florida Bar wants its members to understand the importance of doing their job well and helping the public. They also want to make sure that the legal system works better and to learn more about the law.

Source: https://www.floridabar.org/the-florida-bar-journal/roth-ira-conversions-benefits-and-planning-opportunities/