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Roth IRA CPA discusses 2012 deadline for Roth IRA Conversion

Roth IRA CPA Wilmington NC discusses conversions

Gary Bode, CPA: Multiple parameters factor into a Roth conversion decision. For a free phone consult, call (910) 399-2705.

Roth IRA CPAs generally think 2012 is the last year taxpayers can convert a traditional IRA to a Roth IRA with favorable tax consequences. Why?

  • The Bush-era tax cuts are expected, again, to expire at the end of 2012. Marginal tax rates will increase. Phase-outs will return.
  • The $100,000 Adjusted Gross Income limit on Roth conversions is gone.
  • Additional tax increases are likely for Americans “doing well.”

Why Were Roth IRAs Established?

In 1989, Congress created Roth IRAs as a social tax incentive to encourage more annual retirement contributions than traditional IRAs allowed.

OK, Some Basic IRA Back Ground

  • Traditional IRA contributions are tax free when contributed, but taxable upon withdrawal.
  • Roth IRA contributions are made after taxes, but incur no income tax when distributed.
  • There is an additional 10% tax on distributions if withdrawn before age 59 1/2. CPAs frequently see folks caught in this tax trap.
  • There are IRS penalties if minimal distributions aren’t made by age 70 ½ for traditional IRAs but not Roth IRAs.
  • The IRS sets annual limits on traditional IRA contributions. There is a nasty 6% excise tax on excess contributions!
  • Roth IRAs grow tax-free.
  • Traditional IRAs grow tax deferred.

Roth IRA Conversions

Essentially you pull money out of your traditional IRAs, pay the tax on them this year, and covert them to Roth IRAs that grow tax-free. Obviously, consult with your Roth IRA CPA before making any decision. This post provides general information.

Roth conversion decision factors include:

  • The time remaining until your expected retirement.
  • How fast the IRA assets can be expected to grow.
  • Whether you’ll need IRA distributions after age 70 and a half.
  • Ability to pay the income tax on Roth conversions this year.
  • Estate planning objectives.

Roth Conversion Recharacterization

You can change your mind and convert your Roth IRAs back to traditional IRAs, with certain time limitations. For example, the worth of your IRA could drop after converting, so recharacterization might be prudent. But your IRA custodians get commissions coming and going.

I’m a Roth IRA CPA with a virtual office to serve clients outside of my Wilmington NC base. If you haven’t got a local Roth IRA, or just like what you read on this website, consider calling us for a free phone consult at (910) 399-2705.

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