Do you have an IRA?
If so, it is probably what is termed a traditional IRA. As you may know, withdrawls from a traditional IRA are taxed as ordinary income. There is another type of IRA – a Roth IRA. One big difference between the two is that withdrawls from a Roth IRA are not taxed. Another important difference is that you do not have to make any withdrawls at age 70 ½ if you don’t want. This can be especially important to high-net-worth individuals because the Roth IRA can be passed on to their children. And, the children’s withdrawls are not taxed either.
The unfortunate thing is that the eligibility to contribute to Roth IRAs or convert a traditional IRA to a Roth IRA has been limited. For instance, in 2008 you could make a Roth IRA contribution if your adjusted gross income was less than $169,000 (married filing jointly). Effectively, upper income taxpayers have been precluded from enjoying the benefits of a Roth IRA.
In May 2006 there was a pretty significant change to the tax laws and the rules for Roth conversions. In 2010 and that one year only, any taxpayer will be allowed to convert a traditional IRA to a Roth. Converting the previously untaxed (ie, IRA rollovers) or tax deducted IRAs will generate taxes. But those taxes are to be paid one-half in 2011 and one-half in 20012 – a generous deferral indeed. Consider this added incentive. Many traditional IRAs have suffered steep stock market declines thus the conversions taxes will be considerably less.
This is pretty exciting stuff but it’s always best to make informed decisions. Be sure to check with your tax professional to determine if the 2010 rule change is right for your situation.
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