Regardless of what you think about the extension of the tax cuts and unemployment benefits that recently passed Congress at the President Obama’s urging, the situation has:
1. opened up an opportunity for those still mulling a Roth IRA conversion
2. Reduced expected taxes on those who elected to pay the conversion taxes
for the 2011 and 2012 tax years under the 1 time special conversion privilege for 2010.
3. and it has prompted those who decided not to convert previously to recheck the idea before the end of the year and take care of some “early retirement planning.”
What’s going on? let me catch you up on what I’m discussing:
Because of a tax provision from the Bush era, investors were allowed a special opportunity in 2010 ONLY to convert their Roth IRA, and pay the taxes not in the 2010 taxable year, but split 50/50 in the 2011 and 2012 tax years. This was somewhat attractive in that it allowed investors to deferred the taxes owed. The downside was that the taxes paid in 2011 and 2012 would be at the higher tax rates that were returning due to the expiration of the so called “Bush tax cuts.” This caused a person to consider paying the taxes in 2010 at the lower rates vs spreading them over 2011/2012 under the special rule.
However, with the extension of those tax cuts, the problem of paying higher tax rates in 2011 and 2012 has just been eliminated. Therefore, people who were avoiding the conversion due to the desire to avoid the higher taxes, no longer have to worry about that.
The tax bill will now be lower and still spread over 2 years if a conversion is done before 2010 ends. So for those who had already decided not to convert, this change brings the idea back on the table.
Your Action Plan
- Gather your account documents
- Schedule a meeting with your accountant or planner
- Have your accountant/planner analyze the tax implications of conversion vs not converting in both the short term tax hit and long term results
- Make a decision before January 1, 2011 whether you should pursue this strategy or not
If you’d like to discuss the idea of making your retirement savings plan tax free with a knowledgeable retirement planning consultant, contact our office by either:
1. using our contact form
2. calling us at 781.393.0021
3. send us an email: Email Walnut Hill Advisors, LLC
To learn more about our firm, a comprehensive financial planning firm based in Medford, MA, just outside Boston, click here: Walnut Hill Advisors, LLC
To learn more about the principal of the firm: About Chris Grande