Rising federal deficits, state and local governments struggling to provide services with lower revenues and a sluggish economy all lead to the inevitable, rising taxes for American taxpayers. However, there is an opportunity in 2010 and hopefully beyond to plan for this continued bite out of our personal budgets by converting existing retirement plans to a Roth IRA.
As a result of the tax cuts under the Bush Administration, the income limits for high wage earners were eliminated beginning in 2010(and hopefully beyond), allowing otherwise ineligible taxpayers to convert existing retirement plans to a Roth IRA. The advantages of doing this in 2010 are numerous. They include limiting rising tax burdens in the future, total tax free withdrawals upon retirement, and other unique opportunities in estate planning.
When a taxpayer converts existing retirement plans to a Roth, they pay income tax as though the money was earned in the year of conversion. The government allows the taxpayer to pay the tax over two tax years and once this conversion is made, the Roth and all investments and earnings are completely TAX FREE, not just tax deferred as in traditional IRA’s or other types of retirement accounts.
When a taxpayer reaches age 59 ½ years of age, they are eligible to begin taking these tax free distributions if they choose to. However, there are no mandatory withdrawal requirements similar to other retirement plans, leading to the most advantageous benefit of Roth conversion, an estate planning bonanza.
A tax payer who has the luxury of not needing this money at retirement age or who has the misfortune to die at an early age is able to leave the converted Roth to his heirs with no tax due. This is passed directly to the named beneficiaries and not included in the overall estate that is subject to estate taxes. Wealthy taxpayers should consider doing this conversion after thorough discussion and planning with their tax advisors so as not to miss out on this potentially small window of opportunity.
At this point, the reader is probably wondering, why is a real estate broker telling me this and what does this have to do with real estate? The simple answer is that these funds may be used to diversify your portfolio by investing them in real estate, real estate notes, tax certificates, foreclosed properties and other non-stock market assets by using a self directed IRA. The details of this amazing estate building tool will be shared next month.
Suzanne Scott, CCIM, a director with KW Commercial Real Estate, has been a commercial investment real estate broker for over 27 years. She specializes in real estate wealth maximization through innovative tax planning. She can be reached at Suzanne@SuzanneScott.com.
