Beginning in 2010, the income limitation was removed, so converting to Roth IRA's became a potential planning opportunity. However, there are some downsides to consider.
A Roth IRA can provide numerous planning benefits. In general, assets contained in a Roth IRA and distributions from a Roth IRA are not subject to income tax . Also, there are no required minimum distributions when an individual reaches age 70-1/2, as is the case with other retirement accounts, such as traditional IRAs. These two features of a Roth IRA allow an individual to create a pool of assets that will never be subject to income tax, and that could potentially continue for decades depending upon the designated beneficiaries named under the Roth IRA.
Contributions to a Roth aren't deductible, but earnings are tax-free , as long as the Roth owner is at least 59½ and has owned the Roth for at least five years . Brokerage firms and mutual fund companies are eagerly promoting this opportunity to clients who have lots of money sitting around in traditional IRAs and 401(k) plans. There's even an iPhone app for Roth conversions.
The downside is that when the traditional IRA is converted to an Roth IRA, taxes are currently due on the taxable portion of the traditional IRA. A traditional IRA may consist of deductible and/or nondeductible contributions, depending upon whether the contributor (or his or her spouse) was an active participant in an employer-sponsored retirement plan, and depending upon his or her adjusted gross income. To the extent a traditional IRA was funded with nondeductible contributions, there would be no taxation upon the conversion into a Roth IRA. To the extent a traditional IRA was funded with deductible contributions (and to the extent of the growth on all contributions), there would be taxation upon the conversion into a Roth IRA.
Contributions to both a Roth IRA and a traditional IRA are limited to the total amount allowed for either ($5,500 for tax year 2014 -- $6,500 if over 50 years of age). The total contributions allowed per year to all IRAs is the lesser of one's taxable compensation (which is not the same as adjusted gross income) and the limit amounts as seen below (this total may be split up between any number of traditional and Roth IRAs. In the case of a married couple, each spouse may contribute the amount listed):
|Age 49 and Below||Age 50 And Above|
|* Contribution limits are assessed for a potential increase based on inflation. .|
As a general rule, this chart reflects the maximum contribution limits. But keep in mind, there are always exceptions to the rule, and these maximum rates do not apply to everyone since the maximum 2014 Roth IRA contribution limit phases out as one's income rises above the threshold for making the maximum contribution. Similarly, one's ability to make 2014 Roth IRA contributions depend upon their income level as related to their tax filing status.
So, the conversion to a Roth IRA may not be of interest to those people who would prefer not to fund their retirement and/or have to pay tax currently. Those people would prefer instead to defer their tax on IRA distributions.
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There are many aspects to an overall estate plan, which should properly be reviewed by an attorney and tax planner on an individual basis.
This information is intended to give you a limited understanding of various aspects of estate planning, but it cannot substitute for a thorough review with your estate planning attorney. Preparation of Wills, Trusts and other estate planning instruments must be implemented as part of an overall estate plan.
The estate plan should reflect your family, economic and tax goals.
Thorough planning and review of each individual's needs, including their tax considerations must be discussed with qualified professionals.
To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained herein, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any matters addressed herein.
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