Year of the…Roth?

The 2010 year presents a unique opportunity for high-net work individuals.  Prior to 2010 most individuals making over $100,000 per year, were restricted from converting a Traditional IRA or 401(k) to a Roth IRA.  However, 2010 presents an opportunity to those previously restricted. Not only will high earning individuals be able to complete these conversions during 2010, they will also be able to do so without incurring the normal 10% penalty for early withdrawal, and the tax burden can be deferred over a two year period (2010 and 2011 tax years). 

So why is this important to you as a high earning individual?

Let’s face it; taxes aren’t going down in the foreseeable future.  With increasing federal and state deficits and additional programs being proposed on a daily basis, there is more of a chance taxes will increase over the long-term as opposed to them decreasing.  Thus, taking a smaller hit now may be more beneficial than taking a larger hit down the road depending on the circumstances.

Also consider this: the market is still down from its high in 2007 and is at approximately the same level it has been for the past five years.  Taking that into consideration, any money put into a pre-tax account during that time frame, will likely have little if any capital gains to pay taxes on

So who would benefit from this most?

Not considering other factors unique to each individual, people that stand to benefit the most are:

  • Wealthy Individuals
  • Those seeking to reduce estate settlement
  • Individuals who won’t need to draw income from converted accounts
  • Young high-earners
  • Those who believe their tax bracket will be higher in retirement

The kicker in all of this is (and golf fans will love this), you get a mulligan.  If for any reason you regret the decision or it becomes a bad decision due to market fluctuation, you can reverse the transactions without any tax consequence within six months of the tax return due date (i.e. April 15, 2011 due date would give you until October 15, 2011). 

Here at dbbmckennon we would be more than happy to answer any questions you may have about these conversions, the tax consequences, and discuss what is in your best interest as a unique individual.  We can also refer you to one of our trusted financial advisors, who can assist you in a Roth conversion; even if you don’t have one set up yet. 

Plan today, to give yourself a brighter future tomorrow.