By Heather, CPA (Balance With Purpose)
It’s a new year, and there are many tax law changes going into effect that promise to keep life interesting and tax professionals busy. As a CPA, I like to think of this as job security.
Today, I’m highlighting one of my favorite tools to use for tax planning and saving for the future–the Roth IRA.
First, let’s look at the basics:
- A Roth IRA must be designated as a “Roth” at the initial set-up at a bank or brokerage firm;
- You cannot deduct contributions made to a Roth IRA, but if certain requirements are met, qualified distributions are tax-free;
- You may contribute to a Roth IRA if your AGI is less than $169,000 for Married Filing Jointly ($116,000 for Single); and
- You may contribute $5,000 ($6,000 if you are over 50) per year.
Why I like the Roth IRA:
- You may withdraw any contributions you make to a Roth IRA at any time tax- and penalty-free. This makes it a very useful everyday savings tool;
- Earnings inside a Roth IRA grow tax-free (not tax-deferred);
- Once you reach age 59 ½, as long as you’ve had your IRA 5 years, you can take distributions 100% tax-free, including earnings;
- Certain other “qualified distributions” can be made tax-free as well, such as for a first-time home purchase or if you become disabled; and
- There is no mandatory withdrawal rule with a Roth IRA like there is for a traditional IRA. Therefore, you can allow your Roth IRA to continue to grow tax-free even after reaching age 70 ½, making this a very useful estate planning tool.
What’s changing for 2010? Prior to 2010, you could convert a traditional IRA to a Roth IRA if your Adjusted Gross Income (AGI) was below $100,000, and you paid the income taxes on the amount of the conversion.
In 2010, the $100,000 income limitation goes away, allowing anyone to convert.
Also, in 2010, you can choose to spread the ordinary tax bill on the amount of the conversion between your 2011 and 2012 Federal income tax returns. After 2010, the amount of the conversion will have to be added to income in the year of the conversion.
For all the reasons listed above for “why I like the Roth IRA,” you should take note of these rule changes for 2010. There is no better time to look at a possible IRA conversion. The market is down, making the value of an investment account lower for some people. This would mean your potential tax bill on a conversion would also be lower.
Also, many experts believe that the increased and reckless government spending could send us into higher tax rates in the future. So, this might be the perfect time to convert–while you are in a lower tax bracket. But be careful that the conversion doesn’t send you into a higher bracket.
As with any financial decision, you should consult with your tax advisor and take your own personal tax circumstances into consideration before making a decision to convert. You will want to know the full impact of an IRA conversion on your finances, taxes and your estate.
Heather Sunseri is a Christian, wife and mother of two young children. She has worked as a CPA for the past 15 years for thoroughbred horse farms and in public accounting in Central Kentucky. She spends her free time as an inspirational writer and enjoys the little things in life from long bike rides in the country to homemade pizza and family game night.