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Roth IRA: 2010 the Year of the Conversion

In an effort to raise capital, the federal government is offering everyone the ability to convert all or a portion of their Traditional IRA to a Roth IRA. As an incentive, the tax liability can be deferred to 2011 (paid 4/2012) and 2012 (paid 4/2013) equally or fully paid in 2010. The last time a conversion program was offered was in 1996 with the tax liability spread over a four year period. The end result is going to be raising tax revenues sooner rather than later. So, is this something you should consider doing? The answer is always, it depends!

What are the primary benefits of a conversion?

Potential Lower Taxes: An expectation that income taxes are more likely to increase in future years than decrease.
Diversification of retirement income resources. Having all retirement money in taxable accounts reduces flexibility in spending.

1. No RMD (Required Minimum Distribution): Not being required to make withdrawals, allowing the account to continue growing.
2. Tax free income from Roth IRA does not impact government benefits. (Medicare Part B premiums, SS benefits, etc.)
3. Ability to pay the income tax or the conversion out of other assets.
4. Taxable income from conversion may provide opportunity to offset certain losses from self-employment and obtain greater tax benefits from deductions.
5. Recharacterization: If the markets go down by the time you file tax return, the conversion can be canceled, a do-over!
6. Long Term: May provide more spendable income to yourself, spouse, children and grandchildren.

What to do

1. Review your IRA conversion options to determine the tax cost and resources to pay for the conversion.
2. The earlier the better, make the conversion in January. That gives you 15 months to see if the assets grow before you are locked into the conversion.
3. Multiple accounts: It may be prudent to open multiple Roth IRA accounts and allocate a different asset class to each. If one falters you could recharacterize just that account as you will not be able to segment one account.
4. Contact an advisor who knows ALL THE STRATEGIES AND TECHNIQUES AVAILABLE -(methods of greatly mitigating the taxes on the Roth conversion and creatively growing the “tax-free” Roth via instruments NOT directly linked to the market).

Ray Griffith is president and CEO of the Granite Financial Group (Keller, TX) and can be contacted at (817) 379-9323 locally or (800)988-4321. Offices are located in Keller, Arlington, and Cleburne.

Securities and Investment Advisory Services offered through Woodbury Financial Services Inc., Member FINRA, SIPC, and Registered Investment Advisor, 1670 Keller Parkway, Suite 200, Keller, Texas 76248 (817 379 9323). Granite Financial Group and Woodbury Financial Services, Inc. are not affiliated. Neither Woodbury Financial Services, Inc., nor its registered representatives or employees, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.