To Roth Or Not To Roth, by Jaimie M. Blackman

In 2010 Congress removed the income restrictions to convert an IRA to a Roth. So what are we waiting for? Well firstly you have to pay the tax man. Any conversion you do in 2011 will be considered as recognized income and a check has to be cut come April.

For a Roth conversion to make sense you need to be able to justify writing a check now in return for:

  1. The elimination of Required Minimum Distributions (RMDs, or MRDs)- The government has been patiently waiting giving you tax deferrals for years. Now it’s payback time. Any distributions from an IRA is  recognized as income, taxed at your ordinary federal  and state tax rate.
  2. Tax Free Income- Once your IRA is converted to a Roth the fun begins. Tax Free income and no more RMDs for you or your spouse. Your children or grandchildren will have to take a small percentage out, but they are still tax free. Please note that any withdrawals before 59.5 are subject to a 10% early withdrawal charge and for distributions of gains to be considered qualified tax-free, there is a 5 year waiting period.
  3. Hedge against future taxes- Do you think taxes are going up in 2013? As of now they are. The tax bill that President Obama signed into law December 2010 which rolled back the taxes to the Bush era is set to expire in 2013, with the top federal tax rate moving from 35% to almost 40%. If you plan on being in a high tax bracket throughout retirement why not pay taxes at a potentially lower rate.
  4. Elegant estate planning tool. OK. You don’t need the income from your IRA and neither does your spouse. Why not leave a tax free legacy to a child or grandchild. Remember that a Roth IRA is still part of your estate, but it is not subject to income tax. It’s key to note that your IRA may be subject to double taxation. One for your estate, and one for your income tax.

So is converting your IRA to a Roth primarily a tax decision? I don’t think so. I see it as a planning issue first and an implementation issue second. For example let’s say your intention is to include your granddaughter as part of your legacy. Why not convert part or all of an IRA to a Roth. You satisfied your intention to give while reducing your estate by paying the tax on conversion and you left your little beauty a tax free legacy. Bear in mind she will have to take RMDs at her age.

I was reminded that leaving money to family and loved ones is a gift of love when after a class I was teaching at the 92nd Street Y in NYC, I overheard a quick exchange between a mother and a daughter.

Mommy how do you get your name on the wall?  And the mother replied -sweetheart these people gave money to something they cared deeply about.

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