ARCO Alumni

Exploring the ROTH Conversion Opportunity
By Ted Stanley, Advancial Investment Services

Although 2010 brought about many changes, none may be as important to retirees (pre or post) as the opportunity to convert Traditional IRA accounts to Roth IRA accounts. There may be great tax advantages to consider when thinking of converting your Traditional IRA to a ROTH IRA.

As a provision of the Tax Increase Prevention and Reconciliation Act of 2005, the income limitations for converting to a ROTH IRA have been eliminated in 2010. The once-imposed limit for those making over $100,000 in annual income is eliminated and anyone wishing to convert in 2010 can consider doing so regardless of income levels.

There are many reasons to consider the conversation of Traditional IRA or retirement accounts to a ROTH IRA account. The most glaring is possible tax-free income in retirement years. Withdrawals taken from a ROTH accounts generally come out free of income tax.

•Split the Tax Liability over two years. Converting Traditional IRAs to Roth IRAs can be a taxable event and can create tax liabilities. However, taxable income created as a result of the conversion in 2010, can be divided in half and taken in 2011 and 2012. The account holder should have other funds (non-qualified) to pay these taxes. The conversion may not be beneficial if the account owner has to pay penalties for early withdrawals (those under 59 ½) and taxes on the funds withdrawn.
•No RMD. Unlike the Traditional IRA account, the ROTH account has no required minimum distribution. So once an account holder becomes 70 ½ he is not “forced” to take withdrawals which could increase the tax liability in the later years.
•Tax Free Income. In its nature of being a ROTH account, distributions from this account are tax-free, if, a: the owner is over age 59 ½ and b: it has been five years since the conversion.
•Tax free income to Beneficiaries. If the account has been open for five years, beneficiaries can receive tax free income when inheriting a ROTH IRA.

If the account owner does not have funds outside the Retirement account to fund the tax liability created by the conversion, the benefit of converting may be negated. If the account holders feels his/her tax rates may be lower in the future, one may determine that paying the taxes now at a higher rate currently is not an advantage. If the account holder might need to take money from the account within the next five years, a conversion may not work well.

There are many aspects to consider when thinking of the 2010 conversion opportunities. The Roth conversion may work very well for some, it may be marginally beneficial to some and may not work well at all for others. Each situation is unique, therefore, please visit an investment professional to determine whether this opportunity is right for you.

Ted Stanley is a LPL Registered Investment Advisor Representative.
Advancial Federal Credit Union, Advancial Investment Services
and LPL Financial are unaffiliated entities.

Securities and Insurance products offered through
LPL Financial, and its affiliates, Member FINRA/SIPC.

No tax or legal advice was intended or given. Please consult the services of a qualified tax accountant or lawyer for specific tax or legal advice.