This is the eighth and final article of a series dealing with the topic of converting your traditional IRA to a Roth IRA. For prior articles, see:
Part 1 – Reasons to Consider the Roth Conversion
Part 2 – The Recharacterization Option
Part 3 – The Impact of Income Tax Rates
Part 4 – How Long Can You Stretch?
Part 5 – The Impact of Investment Returns During the First 21 Months
Part 6 – The Impact of Estate Taxes
Part 7 – Ramifications of Charitable Giving
Roth IRAs are tremendous assets to own because they grow tax-free, allow tax-free withdrawals, and do not require you or your spouse to make withdrawals.
Determining whether the cost of a Roth IRA is a good investment depends on numerous factors, including income tax rates that will apply to you and your family now and in the future, whether you and your family can pay the conversion tax and meet your spending needs from other sources, whether you will be subject to estate taxes, and how much you plan to give to charity during your lifetime and at death.
Wealthy families are the most likely candidates to benefit from a Roth IRA conversion because they are likely to be in a high income tax bracket in the future, they can pay the conversion tax and meet spending needs from other sources, they will be subject to estate taxes, and they are able to make additional charitable gifts to offset the income tax generated by the conversion.
The recharacterization option is a valuable tool which allows you to make a conversion and then change your mind as long as 21 months later. During this 21-month period, you will see tax law changes that have occurred and how your investments have performed. When you make a conversion, you should create several Roth IRA accounts, with each account holding different asset classes, in order to maximize the flexibility afforded by the recharacterization option.
Most wealthy individuals should make a conversion and follow the steps outlined in the following timeline.
|February 2010||Convert now by creating several Roth IRA accounts that hold different assets.|
|December 2, 2010||Recharacterize Roth IRA accounts that have decreased in value.|
|December 15, 2010||Determine whether you want to make additional charitable contributions to offset income from conversion.|
|January 2, 2011||Reconvert accounts that were recharacterized on December 2, 2010 by creating several Roth IRA accounts.|
|April 15, 2011||Determine the maximum amount of the 2010 conversion that you might not recharacterize (i.e., leave as a Roth) and whether you might treat the income as taxable for 2010 (instead of deferring 50% to 2011 and 50% to 2012). If you might tax the income in 2010, file an extension for filing your 2010 federal income tax return and pay estimated taxes based on the maximum amount that you might treat as income in 2010.|
|October 15, 2011||Final day for recharacterizing 2010 conversions. If you extended the filing date for your 2010 federal income tax return, you must file your return and elect whether to recognize the income from 2010 conversions in 2010, or in 2011 (50%) and 2012 (50%).|
|December 2, 2011||Recharacterize 2011 Roth IRA conversions, if any, that have decreased in value.|
|December 15, 2011||Determine whether you want to make additional charitable contributions to offset income from 2011 conversions and 2010 conversions that were deferred.|