To Convert to a Roth IRA or Stay Traditional
Financial Professional Advises Investors about Important Considerations of Converting Roth IRA Accounts
Fairfield, NJ (April 6, 2010) - Interest in Roth Conversions is on the rise. According to Google data, the number of people searching the phrase “Roth IRA conversion” has tripled since January 2009. But while there is an increase in interest, there is a deficit of good, sound advice about Roth conversions.
According to Brad Bofford, a New Jersey-based independent financial professional, deciding to convert a traditional IRA to a Roth IRA depends on a comprehensive personal financial analysis and general assumptions about the future federal tax code and individual future tax liability.
“The conversion opportunity boils down to analyzing if it’s beneficial to pay taxes now as a way to potentially avoid paying more taxes later,” Bofford explains. “Generally, the economics of converting your traditional IRA to a Roth IRA will work best when you do not need or want to spend funds from your Roth IRA during your lifetime but rather, plan to pass the asset untouched to your heirs, and you have assets apart from your qualified retirement plans to pay the income tax due on your conversion.”
Bofford says that while nobody has a crystal ball to predict future tax rates or whether your Roth assets will be passable to heirs, there are a few assumptions that can be made: “Tax rates will likely increase to levels equivalent to 2001 levels in the next two to three years,” Bofford says. “We can also assume that when the estate tax is re-instated, it will not change significantly from current levels in the next five to 10 years.”
When considering a possible conversion, Bofford says two questions should be considered: 1. What are the benefits of converting? and 2. If conversion makes sense, then what is the ideal amount that should converted?”
Bofford says that the latter question is of great importance. “You must evaluate whether or not you can afford to pay the taxes on converting your entire traditional IRA. If the answer is no, then consider doing a partial conversion now.” Doing so, Bofford says, allows taxpayers to take advantage of a special tax incentive that allows for delayed tax payments by electing to include the taxable portion of the 2010 conversion ratability in taxable income for 2011 and 2012.
All gains and losses to the entire Roth IRA, regardless of the actual stock or fund re-characterized must be pro-rated. For segregation of gains and losses to work in Roth conversions, assets need to be divided into multiple traditional IRAs first then converted into separate Roth IRAs. “There is no co-mingled money,” explains Bofford. “Under IRS rules, you have to consider the entire value of all of your IRAs when converting and figuring taxes on the conversion, if you have nondeductible IRA contributions.” This strategy is complex and could lead to additional account fees, transfer fees, conversion fees and re-characterization fees.
For most people, the conversion question will be answered only after multiple twists and turns. For example, if, in determining whether to convert to a Roth, one assumes a lower tax bracket in retirement, there are additional variables to consider. In addition, consider whether or not the state of residence in retirement has income taxes. Conversion, in some cases, could increase annual income, resulting in a higher tax bracket, potentially causing loss of some or all personal exemptions and itemized deductions.
About Financial Principles, LLC
Financial Principles understands the importance of planning - whether it’s for retirement, saving for college or even charitable giving. Two senior partners, Bradley H. Bofford, CLU, ChFC, and Mike Flower, bring a combined 25+ years of financial services experience to their clientele. Both are recognized as qualifying life members of the prestigious Million Dollar Round Table, “The Premier Association for Financial
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Professionals®“. As representatives of Securities America, Inc., Bofford and Flower are able to provide comprehensive services and advice in all areas of personal finance, such as estate planning, retirement planning and tax reduction strategies.
Bofford and Flower believe that a well-informed client is essential for success. They love taking clients from fear to confidence regarding finances, by placing a strong emphasis on educating people about how to prepare for and enjoy a comfortable retirement. Both advisors have contributed to articles in several leading trade publications including Investment News, Financial Advisor, and Research magazine as well as consumer outlets such as BusinessWeek, Money and New Jersey Business magazine. Learn more at www.financialprinciples.com.
Bradley H. Bofford, CLU, ChFC
310 Passaic Avenue Suite 203
Fairfield, NJ 07004
(973) 582-1000
Toll Free (877) 401-5529
bhbofford@financialprinciples.com
