Friday, July 15, 2011

Roth IRA Conversion Planning in 2011 & 2012

The online edition of the Wealth Strategies Journal provides a complete overview Roth IRA conversion opportunities:

Opportunistic Conversions

The key objective behind this type of Roth IRA conversion is to take advantage of short-term economic conditions that are expected to reverse over time. For example, a taxpayer whose traditional IRA contains stock that is expected to incur significant growth within the near future may benefit from converting to a Roth IRA. As opposed to holding the stock in a traditional IRA, holding the quickly-appreciating stock in a Roth IRA would allow the stock's growth to occur completely tax-free. The concept of converting by asset class to multiple Roth IRAs with the tactic of recharacterizing the underperforming asset classes is another example of an "opportunistic conversion".

Strategic Conversions

The key objective behind this type of IRA conversion is generally motivated by wealth transfer. Considering that Roth IRAs are not subject to "required minimum distributions" ("RMDs") when the IRA owner reaches age 70½, converting a traditional IRA to a Roth IRA will allow the IRA assets to continue to grow tax-free for a longer period of time, thus allowing greater wealth to accumulate for future generations. An ideal candidate for strategic conversion is one who (1) possesses "outside funds" (for example, nonqualified investment accounts) from which to pay the tax on the conversion, (2) anticipates being in the same or higher marginal income tax bracket in the future, (3) does not need to make withdrawals from the Roth IRA to meet his/her annual living needs, and (4) desires to leave a tax-free asset to his/her children or grandchildren.

Tactical Conversions

This type of Roth IRA conversion is executed to take advantage of unused, short-term, special tax attributes that the taxpayer may otherwise not be able to utilize. A non-exhaustive list of these types of tax attributes includes NOL carryovers, current year ordinary losses, unused charitable contribution carryovers, nonrefundable tax credits, as well as alternative minimum tax credit carryovers. By converting to a Roth IRA, the taxpayer generates enough taxable income to fully utilize these tax attributes. If done correctly, the taxpayer could pay little to no income tax on the conversion.

Hedging Conversions

This type of Roth IRA conversion is done as a "hedge" against a future tax increase. Hedging conversions can be further subdivided into two types of conversions: (a) income tax hedging conversions and (b) estate tax hedging conversions. Both types of hedging conversions are generally executed during the current time period so as to lower overall taxes in the future, taking into consideration the potential for higher income tax rates and/or estate tax rates that could be enacted by Congress.

Please feel free to contact us for more information.

PMA - Tax Planning and Advisory