Conditions Still Ideal for Roth IRA Conversions

Today’s federal income tax rates might be the lowest you’ll see in your lifetime, especially if the so-called Bush tax cuts expire this year as scheduled. So if you convert this year, you’ll pay today’s relatively low rates on the extra income triggered by the conversion …

If you were actively planning in 2010 and the years since, then you’ve heard much about the power of Roth IRA conversions. Guess what … Roth IRA conversions are still remarkable and tax-smart.

A recent article in MarketWatch, titled “Roth IRA conversions: Still tax-smart,” extolls the virtues of the conversion strategy and the math behind it. A Roth IRA works like a backwards IRA by allowing you to pay the tax upfront rather than delaying it until later, as with a traditional IRA. Moreover, a traditional IRA can be converted to a Roth within certain restrictions.

This is a retirement planning tool, but it also can also become a powerful estate and gift planning tool. While an IRA can always be left to beneficiaries, every dollar withdrawn is subject to ordinary income taxation. Distributions from an inherited Roth IRA, on the other hand, are taken without any income tax bill. That’s pretty powerful.

We know for the remainder of 2012, the conditions for Roth IRA conversions are favorable.  But what will happen in the future? It is wise to act now and take advantage of this opportunity while it still exists.

Reference: MarketWatch (August 28, 2012) “Roth IRA conversions: Still tax-smart

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