Is It Time For a Roth Conversion?

By Eric Cohen, president
E. Cohen and Company
www.ecohencpas.com

As you may be aware, since January 1, 2010, the income limitation on Roth IRA conversions has been eliminated, making virtually all taxpayers eligible to convert to a Roth IRA.

This presents an excellent opportunity for many taxpayers to shelter future income and appreciation from income taxes. However, there are several factors to consider in determining whether a Roth IRA conversion is right for you.

A little background

In 1997, Congress introduced the Roth IRA, which allowed taxpayers with less than $100,000 ($150,000 – married filing jointly) adjusted gross income (AGI), to make contributions of after-tax dollars to a Roth IRA. Upon retirement, the distributions from the Roth IRA account were free from income taxes.

Additionally, taxpayers who met the AGI limitation of $100,000 could convert their Traditional IRAs to a Roth IRA by paying income tax on the current value of the account. The ultimate question when considering a Roth IRA conversion is whether to pay tax now or later.

Why incur the tax now?

It may be beneficial in the long run for either you or your beneficiaries to pay income tax now and allow the assets to grow income tax free. However, the following factors should be considered:

1. Your current tax rate v. expected future tax rate,
2. Your current cash flow needs v. anticipated future cash flow needs,
3. Any favorable tax carryovers,
4. Family and personal health history,
5. Estimated federal estate tax liability, and
6. Anticipated return on the IRA assets, as well as your non-IRA assets at retirement age.

Looking forward over the next few years, it is highly likely that Congress will increase income tax rates, especially the two highest income tax rates, in an attempt to offset record deficits and to pay off the national debt.

By converting to a Roth IRA today, at lower income tax rates, you, in all likelihood, will convert future income and appreciation within the IRA to tax-free income at a relatively low tax cost.

It's beneficial to convert, if:

1. Tax rates increase in the future,
2. You can afford to use non-IRA assets to pay the income tax incurred on conversion,
3. You will not need to withdraw IRA assets during your lifetime,
4. The assets in the Roth IRA appreciate,
5. You will be subject to estate taxes,
6. You plan to leave the Roth IRA to young beneficiaries.

The 2010 IRA income incurred upon conversion is automatically deferred equally over 2011 and 2012 at the effective tax rates for those years.

However, you can make an election to pay the entire income tax for the conversion in 2010 based on 2010 tax rates. Additionally, you can do a partial conversion of your Traditional IRA in 2010 and another part in 2011, 2012, etc.

Questions? Contact us at 301.917.6200 if you would like to discuss your specific situation.

About Eric Cohen, CPA
President, E. Cohen and Company

Eric Cohen is the president and founder of E. Cohen and Company, CPAs, which specializes in auditing, taxation, accounting services, computer systems, internal control evaluations, and litigation support services.

For more than 25 years, he has provided services to entities of all sizes in the Washington, DC metropolitan area, advising them on tax compliance and planning, estate planning, and business development.

Eric primarily provides tax research, planning and compliance services to high-income individuals, C-corporations, LLC's, S-corporations and partnerships. He also provides audit and accounting services to these same entities.

Additionally, he has extensive experience with computer applications for financial/tax planning and analysis, accounting systems design and implementation, and database management. His industry specializations include real estate, government contractors, not-for-profit, wholesalers and professional service companies.

He has provided expert testimony in the District Court of Maryland and has provided litigation support services. These services include providing legal analysis, tax analysis, and acting as liaison between counsel on legal matters.

Eric has acted as managing partner for various partnerships and has managed the financial affairs of their affiliated entities and trusts.

Contact Eric Cohen at ECohen@ecohencpas.com.

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