In the past, taxpayers who have had adjusted gross income (AGI) above $100,000 were precluded from converting a traditional IRA to a Roth IRA. However, beginning with the 2010 tax year, this limitation will be lifted, thereby allowing many more taxpayers the opportunity to convert to a Roth IRA. Should your client convert?
Here are some reasons to convert to a Roth IRA:
1. Taxpayers have special favorable tax attributes, including a high basis ratio, charitable deduction carry‐forwards, Y tax net operating losses (NOLs), etc. This is because these attributes reduce the effective tax rate of the conversion.
2. Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder. This allows for additional tax‐free deferral.
3. Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election A Roth is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax. This is because the IRC § 691(c) deduction is inefficient.
4. Taxpayers who can pay the income tax on the IRA from non IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax‐free yields. This is because of the ability to move funds from a “taxable” to a “tax‐free” tax asset class.
5. Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds. This is because the exemption is funded on an after‐tax basis.
Want more information on Roth IRAs to help you advise your clients? Join Bob Keebler, CPA, MST in a live webcast on July 21. Bob is a partner with Baker Tilly Virchow Krause, LLP and a 2007 recipient of the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planners & Councils. He has been named by CPA Magazine as one of the Top 100 Most Influential Practitioners in the United States as well as one of the Top 40 Tax Advisors to Know During a Recession. Webcast presented by CPE Link.