©UFS
Roth IRA
Conversions
Continuing
Education
for CPAs
Presented By:
Title:
L1209077039[exp1210][All States][DC]
Metropolitan Life Insurance Company, New York, NY 10166.
New England Financial is the service mark for New England Life Insurance Company and related
companies, 501 Boylston Street, Boston, MA 02116.
MetLife companies.
MetLife Insurance Company is registered with the National Association of
State Boards of Accountancy (NASBA), as a sponsor of continuing
professional education on the National Registry of CPE Sponsors. State
Boards of accountancy have final authority on the acceptance of individual
courses for CPE credit.
Roth IRA Conversions
Continuing
Education
for CPAs
Objectives
• To discuss the benefits and costs of converting a
Traditional IRA to a Roth IRA in 2010.
• To examine the critical factors to consider in
deciding whether or not to convert a Traditional IRA
to a Roth IRA.
• To develop an analytical framework to help you
assist your clients in making an informed decision
Roth IRA Conversions
Continuing
Education
for CPAs
The Opportunity – Converting IRAs to Roth IRAs
• Possibility of higher marginal income tax rates in the
future.
• Depressed values of existing IRA balances may
reduce the taxable gain that otherwise would have
been due.
• A temporary opportunity:
– Tax incentives for 2010
– Roth conversions may not survive future changes to
the tax code.
Roth IRA Conversions
Continuing
Education
for CPAs
Background
• Taxpayer Relief Act of 1997 creates tax-favored
accounts (Roth IRAs) from which funds can be
withdrawn without tax, after a reasonable holding
period and certain other requirements.
• Individuals whose modified adjusted gross income
(AGI) exceeded statutory limits are not able to
contribute to a Roth IRA.
Roth IRA Conversions
Continuing
Education
for CPAs
AGI Limits on Roth Contributions: 2009 and 2010
Filing Status
Married
filing jointly
Single, or Married
Filing Separately
(separate
household)
AGI
Contribution*
Less than $166,000
Up to $5000
$166,000 - $175,999
Less than $5000**
$176,000 or more
- $0 –
Less than $105,000
Up to $5000
$105,000 - $120,000
Less than $5000**
$120,000 or more
- $0 -
* Contribution limit increased to $6000 for taxpayers over age 50
** Contribution limit phased out as income increases
Roth IRA Conversions
Continuing
Education
for CPAs
Background
• Individuals whose modified AGI exceeded $100,000
have not been able to convert a Traditional IRA to a
Roth IRA.
• The Tax Increase Prevention and Reconciliation Act
of 2005 (TIPRA) repeals the $100,000 modified AGI
limitation on Roth conversions, beginning in 2010.
• TIPRA effectively eliminates the income limits on
contributions as well, as taxpayers (up to age 70 ½)
will be able to first contribute to a nondeductible
Traditional IRA and then immediately convert to a
Continuing
Roth IRA.
Roth IRA Conversions
Education
for CPAs
2010 Opportunity
• In 2010 and following, all taxpayers can convert their
Traditional IRAs (both deductible and nondeductible) to Roth
IRAs.
• The amount converted is currently taxable to the extent of
previously deducted IRA contributions and earnings
(nondeductible contributions made to the IRA constitute basis
and are not taxed).
• Taxable income from conversions in 2010 can be spread over
two years – 2011 and 2012.
• However, for conversions involving annuity contracts, the
taxable amount be based on more than just previously
deducted contributions and tax deferred earnings.
Roth IRA Conversions
Continuing
Education
for CPAs
2010 Opportunity – Example 1
• Taxpayer has two IRAs - IRA 1 has a value of
$100,000, composed of nondeductible
contributions ($50,000) and earnings.
• IRA 2 has a value of $150,000, composed of
deductible contributions ($100,000) and earnings.
• The taxpayer will only convert IRA 1 to a Roth IRA.
Roth IRA Conversions
Continuing
Education
for CPAs
2010 Opportunity – Example 1
• All of the taxpayer’s IRAs will be aggregated for
purposes of determining the ratio of gain/basis,
regardless of which IRA is converted.
• In the aggregate, IRA 1 and IRA 2 have $200,000 of
deductible contributions and earnings out of
$250,000 in value.
• In this case then, 80% ($200,000/$250,000) of the
amount converted or $80,000 (80% of $100,000)
will be taxable income and 20% will be nontaxable
return of basis.
Roth IRA Conversions
Continuing
Education
for CPAs
2010 Opportunity – Tax Payments over Two Years
• If the conversion occurs in 2010 the individual
includes one-half of the taxable amount in 2011
gross income and the other half in 2012 gross
income.
• If the individual elects out of the two-year spread,
then he or she reports the entire income in 2010.
• Taxpayers who expect income tax rates to increase
in 2011 and 2012 might choose to include all of the
income in 2010.
Roth IRA Conversions
Continuing
Education
for CPAs
2010 Opportunity – Example 2
• Example: Jack has $100,000 in his Traditional IRA.
For several years, he made after tax contributions
to his IRA totaling $20,000.
• If Jack converts his IRA to a Roth in 2010, Jack
could
– report $40,000 in 2011 and $40,000 in 2012, or
– report the entire $80,000 of taxable income in 2010.
• In either case, Jack incurs no 10% federal income
tax early withdrawal penalty if the entire $100,000 is
contributed to the Roth IRA.
Roth IRA Conversions
Continuing
Education
for CPAs
2010 Opportunity – Tax Payments over Two Years
• Clients taking advantage of the two-year spread
should take action this year to make sure that the
have the cash to pay the tax with non-IRA funds.
• Distributions from the Traditional IRA or from the
new Roth IRA may be subject to both income and a
10% excise tax.
Roth IRA Conversions
Continuing
Education
for CPAs
2010 Opportunity – Tax Payments over Two Years
• The ability to spread income over two years is only
available for conversions which take place in 2010.
• If the conversion occurs after 2010, the individual
reports the entire income in the year of conversion.
• For example, if the taxpayer converts to a Roth IRA
in 2011, the tax must generally be paid by April 15,
2012 and the taxpayer may be required to make
estimated payments during 2011.
Roth IRA Conversions
Continuing
Education
for CPAs
2010 Opportunity – Re-characterizations
• Taxpayers may re-characterize – i.e., undo – conversions
• The re-characterization must generally be made by the due
date of the taxpayer’s return, plus any extension.
• Generally, the re-characterization can be as late as October
15th of the year following conversion.
• Only one conversion and re-characterization is permitted
during a year.
• Taxpayers may wish to keep the conversion proceeds
separate from other Roth IRAs in order to more easily recharacterize the account back to a Traditional IRA.
Roth IRA Conversions
Continuing
Education
for CPAs
Conversion Sources
• Traditional IRA
• SEP IRA
• SIMPLE IRA (but there are certain limitations for
SIMPLE IRAs)
• An eligible rollover distribution from the following
non-Roth eligible retirement plans:
– 401(a) qualified retirement plan (e.g., 401(k) plan),
– 403(a) annuity plan,
– 403(b) tax sheltered annuity, or
– eligible governmental 457 plan.
Roth IRA Conversions
Continuing
Education
for CPAs
Changing from a Traditional to Roth IRA
• Retitling method
– First, an individual can generally make a conversion without
actually taking a distribution. For instance, an individual
may make a conversion by simply notifying the IRA trustee
to change the Traditional IRA to a Roth IRA.
• Trustee-to-trustee direct method
– Transfer from the existing account to a new account or to a
new account with a different custodian
• Distribution and Rollover method
– Distribution to the taxpayer and rollover to a new Roth IRA
within 60 days
Roth IRA Conversions
Continuing
Education
for CPAs
Convert SEP IRAs or SIMPLE IRAs
• Convert SEP or SIMPLE IRAs
– SEP or SIMPLE IRAs (after two years of participation)
can also be converted to Roth IRAs.
– The taxpayer will need to set up a new SEP or
SIMPLE IRA to receive any new SEP or SIMPLE IRA
contributions after the taxpayer converts.
Roth IRA Conversions
Continuing
Education
for CPAs
Convert 401(k) or 403(b) Account Balance
• An eligible rollover distribution from an employer
sponsored qualified retirement plan can be
converted to a Roth IRA.
• Tax Planning Opportunity:
– Client can first rollover pre-tax amounts to his/her
current employer’s plan if current employer
permits such rollover.
– Afterwards, the taxpayer can transfer after-tax
amounts directly to a Roth IRA.
– By using this approach, there should be no
current income tax to the client.
Roth IRA Conversions
Continuing
Education
for CPAs
To Convert or Not?
• Weighing the advantages and disadvantages of
converting a Traditional IRA to a Roth IRA in 2010.
• Suggested two-prong approach:
– First, use a financial calculator to determine whether
the loss of the use of the money spent on taxes today
is less than the present value of the future tax savings
from the Roth distributions.
– Secondly, employ a qualitative approach by
considering the many factors which cannot be easily
incorporated into numbers.
Roth IRA Conversions
Continuing
Education
for CPAs
To Convert or Not to Convert?
Three Most Important Factors:
(i) the portion of the account which consists of aftertax contributions,
(ii) the client’s income tax bracket at conversion and
when distributions are ultimately taken, and
(iii) whether the tax is paid from the IRA itself or
from outside sources.
Roth IRA Conversions
Continuing
Education
for CPAs
The Three Primary Decision Factors
1) Nondeductible Contributions
•
What portion of the IRA balance reflects nondeductible
contributions?
2) Relative Tax Brackets
•
Current vs. future tax brackets?
•
Convert a portion to limit bracket creep due to various
charges and fees, partial conversions of annuities may
not be permitted.
•
Manipulate income?
Roth IRA Conversions
Continuing
Education
for CPAs
The Three Primary Decision Factors
3) Pay Tax From An Outside Source
•
Paying from outside source allows more to be saved for
retirement
•
Paying tax with IRA funds may generate 10% penalty tax
Roth IRA Conversions
Continuing
Education
for CPAs
To Convert or Not? 11 Qualitative Factors
(1) Fees Incurred
(2) Age and Rate of Return
–
The higher the expected rate of return and the younger
the client, the greater the difference will be in favor of the
Roth.
–
Will impact the extent to which the client will gain from
the conversion.
(3) Radical Reform of Tax Structure
–
To the extent that major tax reform is enacted, the early
payment of an income tax may prove disadvantageous.
Roth IRA Conversions
Continuing
Education
for CPAs
To Convert or Not? 11 Qualitative Factors
(4) Change in the Income Tax Rate
– To the extent that the marginal income tax rates for high income
taxpayers increase, the payment of an income tax at today’s
lower rate will be attractive.
(5) State Income Taxes
– If substantial state income taxes are due as a result of
conversion, this will make conversion less attractive.
– If the individual state does not provide for tax-free distributions
from Roth IRAs, this will also make the case for conversion less
appealing.
(6) Retirement Needs
– Elimination of lifetime RMD (but not after-death RMD) allows for
more tax-free growth - Consider “Stretch”.
– Roth IRA would be more attractive to those clients who do not
need retirement income and would like to pass an income taxfree inheritance to children/grandchildren (provided the qualified
Continuing
distribution requirements are met).
Education
Roth IRA Conversions
for CPAs
To Convert or Not? 11 Qualitative Factors
(7) Tax on Social Security Benefits/Higher Medicare
Premiums
– A Roth IRA may make it easier to stay below the Social
Security threshold; or,
– Some senior citizens could push their taxable income
above the level that triggers a tax on their social security
benefits or creates higher Medicare premiums
(8) Impact on Financial Aid Eligibility
(9) Impact on Creditor Protection
– Check the protection provided to IRAs in state of
residence
Roth IRA Conversions
Continuing
Education
for CPAs
To Convert or Not? 11 Qualitative Factors
(10) Estate Taxes.
– By paying the income tax up-front, the size of the estate is
reduced.
– Pre-payment of the income tax is essentially a tax free gift
to heirs
– Roth IRA is a better asset to fund the credit shelter trust
than a Traditional IRA because qualified distributions are
income tax free and do not waste part of the unified credit.
(11) Tax Diversification
Prudent to have various tax buckets which are treated
differently (e.g., tax free, tax-deferred and tax advantaged)
to control tax bracket during retirement
Roth IRA Conversions
Continuing
Education
for CPAs
Actions to Take Today
Advisors should ask their clients who have more than $100,000 of
modified adjusted gross income the following:
– What is the current balance of each of your IRAs, SEPs, SARSEPs
and SIMPLE IRAs?
– How much of each IRA account consists of after-tax contributions?
– Do you have an existing 401(k), 403(b) or eligible governmental 457
plan from a previous employer?
– If so, what is the current balance and how much of that amount
consists of after-tax contributions?
– Does your current employer plan accept rollovers from a previous
employer’s plan?
– Do you wish to make a non-deductible IRA contribution for 2009 and
2010 so as to increase the funds available for conversion? Continuing
Roth IRA Conversions
Education
for CPAs
Conclusion
• Tax-free qualified distributions and no required distributions during the
Roth IRA owner’s life make the Roth IRA a valuable investment vehicle
• In 2010 all taxpayers regardless of income can take advantage of this
new opportunity.
• Conversion tends to be advantageous when:
– (i) the tax rate at retirement is expected to be higher than the tax rate
paid on the conversion,
– (ii) the IRA’s tax basis is high (e.g., after tax contributions were made
to the IRA),
– (iii) the tax due on the conversion is paid from outside sources,
– (iv) the taxpayer is young and he or she has a long investment
horizon, and
– (v) the taxpayer expects to pay estate taxes and would like to pass
the IRA on to his heirs.
Roth IRA Conversions
Continuing
Education
for CPAs
Circular 230 Notice and Disclosure:
Pursuant to IRS Circular 230, MetLife is providing you with the following
notification: The information contained in this document is not intended to
and cannot be used by anyone to avoid IRS penalties. This document
supports the promotion and marketing of insurance products. Clients
should seek advice based on their particular circumstances from an
independent tax advisor.
MetLife, its agents, and representatives may not give legal or tax advice.
Any discussion of taxes herein or related to this document is for general
information purposes only and does not purport to be complete or cover
every situation. Tax law is subject to interpretation and legislation change.
Tax results and the appropriateness of any product for any specific
taxpayer may vary depending on the facts and circumstances. You should
consult with and rely on your own independent legal and tax advisers
regarding your particular set of facts and circumstances.
Continuing
Roth IRA Conversions
Education
for CPAs
©UFS
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Disclosure
Peter Rosengard is an investment advisor representative and a
registered representative of MetLife Securities, Inc. (MSI), which is a
registered investment advisor and a member of FINRA/SIPC.
Insurance offered through the Enterprise General Agency, Inc. (EGA),
Somerset, NJ 08873, and the Metropolitan Life Insurance Company
(MLIC), New York, NY 10166. Products and services offered through
R4 Employee Benefit SolutionsTM and R4 EnterprisesTM are not
guaranteed, endorsed or recommended by MLIC, MSI or the EGA. R4
Risk & Wealth SolutionsTM is a marketing name for Peter Rosengard’s
firm.
Roth IRA Conversions
Continuing
Education
for CPAs
Circular 230 Notice
Pursuant to IRS Circular 230, MetLife is providing you with the following
notification: The information contained in this document is not intended to and
cannot be used by anyone to avoid IRS penalties. This document supports the
promotion and marketing of insurance products. You should seek advice based on
your particular circumstances from an independent tax advisor. MetLife, its agents,
and representatives may not give legal or tax advice.
Any discussion of taxes herein or related to this document is for general information
purposes only and does not purport to be complete or cover every situation. Tax
law is subject to interpretation and legislative change. Tax results and the
appropriateness of any product for any specific taxpayer may vary depending on
the facts and circumstances. You should consult with and rely on your own
independent legal and tax advisers regarding your particular set of facts and
circumstances.
Roth IRA Conversions
Continuing
Education
for CPAs
L1209077039[exp1210][All States][DC]
Roth IRA Conversions
Continuing
Education
for CPAs