| The year 2010 brings an interesting twist to | | | | conversion. This is managed by considering 2010 |
| retirement planning. This is the year when a | | | | rates as compared to 2011 and 2012 rates. The |
| traditional IRA (Individual Retirement | | | | second time that tax is considered relates to |
| Arrangement) can be converted to a Roth IRA | | | | what tax rates will be upon retirement. Will the |
| regardless of adjusted gross income levels. The | | | | taxpayer be in higher or lower rates when |
| conversion does cost the owner tax dollars and | | | | retirement begins? This is where consideration of |
| should be considered when making a complete | | | | the entire portfolio is made. Will there be |
| financial assessment of one's present and future | | | | retirement income from other sources such as |
| portfolio. | | | | income from a employer sponsored plan, or |
| First, let us review the rules of the game | | | | dividend and interest from savings outside of the |
| regarding the conversion. When a traditional IRA is | | | | IRA? The third and final income tax consideration |
| converted to a Roth IRA, the amount in the | | | | deals with Social Security. If enough distributions |
| traditional IRA (less any amount not deducted on | | | | are taken from a traditional IRA, they may cause |
| the 1040 because of coverage by an employer | | | | Social Security benefits to be either taxable or |
| provided plan and adjusted gross income | | | | more taxable. Roth distributions are not included |
| exceeded a given level-basis on form 8606) is | | | | as income and would not cause Social Security |
| subject to income tax. This amount of income | | | | benefits to be taxable. |
| can either be taken into account in 2010 or can | | | | As with anything in a portfolio of assets, there |
| be spread ratably over 2011 and 2010. This | | | | must be consideration given to the estate tax. In |
| provides a tax planning opportunity in itself as we | | | | 2010, the federal estate tax is repealed for one |
| can consider our tax situation in each of the | | | | year. For those passing away in 2010, there is no |
| years involved. For instance, if income for 2010 is | | | | estate tax to pay. After 2010, the federal estate |
| currently down for whatever reason, an election | | | | tax is back in play with the exemption amount |
| then would be made to subject the conversion | | | | falling to $1 million. This means that traditional |
| amount to current year tax rates. If there was | | | | IRA's would face both income tax and estate tax |
| an expectation that income tax rates would be | | | | consequences (IRD or income in respect of a |
| less in 2011 and 2012, then a spreading of the | | | | decedent). Traditional IRA's are subject to |
| conversion income to these years would be the | | | | required minimum distribution (RMD) rules when |
| better strategy. | | | | one reaches the age of 70 and ½. A husband |
| Now that here has been discussion as to how the | | | | who begins taking RMD's at age 70 and ½ might |
| conversion works, let's consider a strategy for | | | | pass away and leave his IRA to his wife who is |
| the overall retirement, income tax, and estate tax | | | | not yet 70 and ½. She will be able to convert |
| situation. For retirement, the goal is to keep as | | | | husband's IRA to her own and stop the RMD's |
| much in the IRA earning returns for the longest | | | | until her age reaches 70 and ½. A beneficiary |
| period of time. By making a conversion from | | | | other than a surviving spouse will have to take |
| traditional to Roth, we are eroding some of the | | | | RMD's but will get to do so over their life |
| asset base (and therefore earnings). If the IRA | | | | expectancy. This beneficiary also has the ability to |
| owner is younger (say 45 and under), the | | | | disclaim the IRA asset and give it to a younger |
| conversion makes a bit more sense as there will | | | | member of the family thus reducing the amount |
| be time to recover through earnings the asset | | | | of the RMD. This is known as creating a "stretch |
| base eroded through taxes. It is also possible that | | | | IRA". Roth Ira's are not required to be distributed |
| any tax due would be paid from a source outside | | | | to beneficiaries. |
| of the IRA which would allow the asset base to | | | | The point of this article is to inform its readers |
| remain intact. If the IRA owner is older and the | | | | that there are many current and future aspects |
| IRA is going to be a significant source of income | | | | to consider before making a conversion from |
| for retirement, the conversion becomes less | | | | traditional to Roth IRA's. Think ahead and make |
| attractive. | | | | an honest assessment for where your portfolio is |
| The income tax consequences rear its head in | | | | headed in the future. |
| three instances. The first is at the time of | | | | |