Roth IRA converting gets easier !

More taxpayers will be able to convert to a Roth IRA in 2005 thanks to expanded eligibility requirements. Roth IRAs, which generally permit tax-free withdrawals of accumulated savings, are an important component of an overall retirement savings strategy.

Unlike contributions to traditional IRAs, contributions to Roth IRAs are not tax-deductible. Instead, withdraws generally are tax-free. Qualified distributions are excluded from gross income. To be treated as a qualified distribution, taxpayers must satisfy a five-year holding period and other requirements.

Roth IRAs have many other advantages. During lifetime, there are no required distributions from a Roth IRA. When a trust is the beneficiary of a Roth IRA, there are additional tax advantages. A Roth IRA can also save on estate taxes.

Sometimes taxpayers want to convert a traditional IRA to a Roth IRA. Personal finances may change, a spouse may die or other events trigger the interest in conversion.

Conversion is not automatic. There are important restrictions. Only taxpayers with adjusted gross incomes below $100,000 can use the Roth IRA rollover provisions. Generally, amounts converted from a traditional IRA to a Roth IRA must be included in gross income. However, they are not considered when determining the $100,000 AGI threshold.

The Roth IRA income limitation can sometimes be circumvented by shifting income. A taxpayer may be able to reposition various sources of income so adjusted gross income remains below $100,000. Income may include Social Security benefits, annuity payments, and pension payments.

Many taxpayers contemplate converting to a Roth IRA after the death of a spouse. Depending on the circumstances, a surviving spouse may be able to reposition assets to bring income below $100,000.

Even with all the advantages of Roth IRAs, some circumstances may preclude conversion. These include:

• Inability to pay the tax on conversion;
• Other assets with low basis;
• Repositioning assets would trigger capital gains tax;
• Age

Conversion may push the taxpayer into a higher income tax bracket. In those cases, an alternative is to spread the conversion over several years. This technique may avoid bunching income.

Many taxpayers have been unable to get under the maximum adjusted gross income bar because of their required minimum distributions from a variety of tax-deferred retirement investment vehicles. In good news for taxpayers, RMDs will no longer be taken into account when calculating the $100,000 income threshold for Roth IRAs.

If you are thinking about converting to a Roth, give our office a call. We can review your personal finances and anticipate if conversion is the best tax strategy for you.