Roth IRA Conversions: Additional Planning Considerations
As mentioned in our first article on Roth IRA conversions, the income limits have been eliminated for Roth IRA conversions in 2010 and 2011. This article will provide some additional planning opportunities related to Roth IRA conversions.
1. Have a profit sharing plan? You can convert to Roth IRA!
Many clients have profit sharing plans and non-traditional IRAs. Luckily, those clients may amend their profit sharing plans to allow early in service distributions to IRAs. There are specific rules regarding the in service distribution. Generally, the distribution must consist of money placed in the profit sharing plan at least two years prior, and the client must have been a plan participant for at least five years. Once the plan is amended, the client may distribute to an IRA, and make a Roth conversion!
2. You can go back in time to reduce taxes on conversion!
Suppose a 60 year old client has $1,000,000 in a traditional IRA. On January 1, 2010, client converts IRA to Roth IRA, resulting in an additional $1,000,000 of income on the 2010 return. Fearing that income tax rates will be higher in the future, he chooses not to spread the additional income taxes over the permitted 2 year period. With a marginal tax rate of 35%, client files tax return on April 15, 2011 and pays additional taxes of $350,000.
On or before October 15, 2011, the Roth IRA account has gone down in value from $1,000,000 to $500,000. Thus, client has lost much of the benefit of conversion. However, client can amend his 2011 return to convert back to traditional IRA, and receive a refund of $350,000. Client can then re-convert back to Roth IRA on January 1, 2012. Upon re-conversion, account is now worth $500,000, so income tax would only be $175,000. Thus, client is not locked in on January 1, 2010 – if the account goes down in value, he can amend his 2010 return and utilize losses to reduce income taxes on conversion!
3. Segregation of IRA account offers even more opportunity to minimize taxes!
Suppose 60 year old client has $1,000,000 in a traditional IRA, consisting of $200,000 of stock 1, $200,000 of stock 2, $200,000 of stock 3, $200,000 of stock 4 and $200,000 of stock 5. Client converts his one IRA account to 5 Roth IRA accounts (one for each separate stock). Fearing that income tax rates will be higher in the future, he chooses not to spread the additional income taxes over the permitted 2 year period. Client has $1,000,000 of additional income, and pays $350,000 of additional taxes on conversion.
On or before October 15, 2011, stocks 1 and 2 go down in value to $100,000, stock 3 remains the same, and stocks 4 and 5 go up in value to $140,000. Client can re-characterize Roth IRA accounts 1 and 2, resulting in a refund of $150,000 by filing an amended return. Client could then re-convert those accounts on January 1, 2012, paying taxes of $75,000 (on $200,000 of income).
In this way, clients can minimize taxes on each separate and distinct asset/stock upon conversion.
If you would like more information on the conversion of a Traditional IRA to a Roth IRA, please call or email Hoffman & Associates today.
404.255.7400
« Georgia Covenants Not to Compete Between Franchisors and Franchisees | Home | Estate Planning with Vacation Homes »
Comments are closed.