Home > News > Opportunities from Post 2009 Roth IRA Rollovers

Opportunities from Post 2009 Roth IRA Rollovers

Volume 2009 / Issue 16

November 11, 2009

Suspension of Required Minimum Distribution Rules
 
Because of the downturn in the stock market, Congress suspended for one year the rule that requires IRA owners to receive “minimum distributions” upon attaining age 70 ½. For IRA owners who received payments in 2009 as “required minimum distributions”, they may roll those distributions over and avoid tax in 2009, so long as the rollover is accomplished by November 30. 2009. Your IRA administrator should be able to help you take advantage of this deferral opportunity.
 
Rollover from traditional to Roth IRAs
 
After 2009, all taxpayers will be able to roll over amounts in qualified employer sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs, regardless of adjusted gross income (AGI). Currently, individuals with more than $100,000 of adjusted gross income as specially modified are barred from making such rollovers.
 
What's so attractive about a Roth IRA? Here's a summary:
  •   Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
  •   Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren't taxed if some relatively liberal conditions are satisfied.
  •  A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 ½ as is generally the case with regular qualified employer plans or IRAs. (For 2009, there's a moratorium on RMDs.) 
  •  Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.
The catch, and it's a big one, is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn't taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you'll owe $28,000 of tax. So you'll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.
  
Should you consider making the rollover to a Roth IRA? The answer maybe “yes” if:
  •  You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you'll have less money building up tax-free within the account.
  • You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.  
  • You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.  
  • You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.
 You should also know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you'll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.
 
We should discuss your entire financial situation before you plan for a large rollover to a Roth IRA after 2009. There also are many details that we should go over, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.
 
We look forward to helping you evaluate whether this opportunity is right for you.