This is the year that those in the higher income brackets with traditional IRA plans need to look at the pluses and minuses of a unique opportunity to convert the IRA into a Roth IRA.
Robert A. Laraia, a West Hartford certified planner who has studied the conversion, says it it highly unlikely that there will again be another opportunity like there is in 2010.
Laraia, a partner with NorthStar Wealth Partners, figures that the government is making this special offer to boost tax revenues.
Until this year there was an income test before traditional IRAs could be converted to a Roth plan. If your adjusted gross income was more than $100,000, you could not make the conversion.
This year the income test is gone.
Why is this important? Because Roth IRA’s offer two critical pluses: you will never be taxed on the money as it hopefully grows, and you don’t have to start taking it out once you are older than 70.
There is a major minus though, the money in a Roth IRA may not be protected from creditors. It differs from state to state, but unlike the traditional IRA, which is untouchable by creditors, the Roth does not appear to have this protection.
Of course you will have to pay taxes on the money you convert from your IRA to the Roth.
And according to Laraia, you will have two years to pay the taxes on the money, which will be treated as ordinary income.
“In effect, this gives taxpayers the ability to delay full payment of any tax due until 2013,” he said.
There are other wrinkles in the conversion. My recommendation is that if you don’t yet have a financial planner, this is the year to hire one. And I recommend that you hire someone who will provide the planning for you on a fee basis instead of a commission on your assets.
Beware of the dangers of paying the taxes over a two year period…
The 2010 Roth IRA conversion rules allow people to defer 50% of their tax bill until 2011 and 50% until 2012 (this is for 2010 only). But please realize that your tax liability is calculated in respect to what you earn in each of those years respectively, NOT the year 2010. So, if your income increases or you get a bonus payment in either 2011 or 2012, it will likely make your tax bill higher than if you just paid the whole bill in 2010.
In addition, the likely expiration of “the Bush tax cuts” will push tax rates up for everyone starting next year (2011). So, if you’ve got the money to pay the tax in 2010, you probably don’t want to defer!
George, slightly off-topic but picking up on your last sentence, might be interesting to explore the nuances between a “fee-based” planner – paid by both fees & commissions (online definition here: http://moneyover55.about.com/od/findingqualifiedadvisors/g/Feeonlyadvisor.htm) and a “fee-only” planner – paid solely by the client (from http://www.napfa.org/consumer/index.asp). Full disclosure: I am a member of NAPFA.