Interested in the Equivalent of a Tax Free Loan in 2010?
By CHM on Jul 19, 2007 in 2010 Roth IRA Conversion Event, Featured, Roth IRA Conversion
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I am a huge advocate of the Roth IRA… I believe if you can afford to convert an existing IRA to a Roth then you should have done it yesterday.
A bit of a refresher here, monies in both accounts grows tax deferred and when its time to take it out:
- the traditional IRA is fully taxed
- the Roth IRA monies are 100% TAX FREE
Some taxpayers are currently not eligible to convert a traditional IRA to a Roth IRA but those rules are changing in the very near future.
Lets take a closer look…
As of this writing, taxpayers with AGI (Adjusted Gross Income) above $100,000, regardless of tax filing status, can’t roll a regular IRA into a Roth IRA. That’s a real bummer, but the good news is the $100,000 AGI limitation will be repealed starting in 2010, meaning all income and filing status restrictions will be gone.
If you make $225,000 a year in 2010, please feel free to convert your traditional IRA to a Roth IRA, thank you very much.
Currently, if you make less than 100K and are eligible to convert to a Roth IRA, the conversion income is taxable income in that year. But as an extra incentive for conversions done in the year 2010, there are no taxes due that year and the taxes due can be spread out over 2011 and 2012.
Interest free loan
Uncle Sam is giving you the equivalent of an interest free loan in 2010 and making the Roth IRA a serious option for all GenXer’s. So if you’ve been thinking about doing a large Roth conversion it may be in your best interest to wait til 2010.
The only thing holding me back from saying a Roth conversion is right for every GenXer is the additional taxable income you will be creating for yourself in 2011 and 2012. Although, in my heart I believe everyone should plan to do a conversion, I know some of you may not be able to come up with the additional monies to pay the conversion taxes when they’re due.
Well no one said you have to convert your entire IRA in 2010, you can convert as much as you can afford to pay in conversion taxes and convert the rest of it to a Roth IRA over time.
The objective is still the same here, which is to get everything you’ve put away towards retirement into a Roth IRA at some point. It would just be nicer to do in 2010 because you don’t have to come up with the money to pay the conversion taxes right away.
The future is wide open
At the end of the day its unrealistic to believe everyone can or will do a Roth conversion, but if a lot of what I’m saying is hitting home, then make it a priority and PLAN PLAN PLAN. I’m writing this on July 19th 2007, this is something that’s over 3 years away, with taxes due nearly 5 years from now.
If the eventual goal is to convert all regular retirement monies to a Roth IRA and never worry about taxes again… then you need to start planning for this.
I’ve written a lot here about financial planning and this whole blog is about the importance of preparing for the future; well this is a big part of the preparation. I’m looking into ways of making Roth conversion planning alot easier for you. There will be a ton about that here in the next couple months.
Maybe I really shoulda named this thing “Roth Matters”…
Tags: 2010 Roth IRA Conversion Event, Adjusted gross income, AGI, Roth IRA Conversion
Heather | Mar 6, 2008 | Reply
Ciaran, this year my husband and I have an automatic withdrawl of $416.00 each month from our checking account that is moved to our Roth IRA’s. With our raises and bonuses this year, we are afraid that we will make more than the allowed amount to contribute to a Roth IRA. Any suggestions?
CHM | Mar 6, 2008 | Reply
Hey Heather, thanks for dropping by. I’ve been getting some emails about this. Please check out this post I wrote on the subject.
If you have any further questions, don’t hesitate to ask… http://chancefavors.com/2008/01/roth-ira-excess-contribution-excise-tax/
Rick | Apr 6, 2008 | Reply
CHM,
Sorry if this is a basic question…
If I convert an IRA (Pre-Tax contributions) to a Roth IRA, will I need to pay taxes on both the original $ contributed and also the gains on the original contributions?
For example…
If I have contributed 50K pre-tax and it has grown to 75K over the years, would I need to pay taxes on the 50K and the gains of 25K?
Thanks,
Rick
CHM | Apr 6, 2008 | Reply
Never a bad question, well almost never.
Once money is in an IRA, there are no capital gains, all distributions (or conversions for that matter) are treated as ordinary income for taxes.
In your case, 75K is treated as ordinary income, if you convert in 2010 you can spread out tax bite over 2 years though… the big reason to consider doing it then.
Scott Smith | Jul 27, 2008 | Reply
CHM,
I have about $20k in an IRA and and interested in converting. There are some reasons making me unsure if it be best for me to wait until 2010. Mainly, wouldn’t the losses of a few $K this year offset the taxes some? Also, I think it is likely the account would be worth more in 2010 when the rebound occurs. Secondly, my income is less this year with my wife off. I think I may be in a lower tax bracket this year. With some luck of another child she may be off for part of 2010 though??? I also pay about $50/yr. for fees on the extra account. Does any of this make you feel it would be best that I convert now?