The Feds Crack Down on IRA Errors, Part II – Wall Street Journal – 07/07/12

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The Wall Street Journal

Family Value – July 7, 2012

The Feds Crack Down on IRA Errors, Part II

By Kelly Greene

Individual retirement accounts are often a source of confusion for families. Even so, we were surprised by the sheer volume of reader questions prompted by our article last month on how the Internal Revenue Service is turning its attention to IRA snafus, particularly mistakes made by people taking required withdrawals and making “excess” contributions.

I heard about a loophole for people who exceed the income limit to contribute to a Roth IRA: Contribute to a regular IRA, and then convert it to a Roth. Is that too good to be true?

A Roth IRA allows people to make after-tax contributions—and most withdrawals are tax-free, a major advantage if tax rates rise in the coming years.

But the highest earners can’t contribute to Roths. The income limit for making any Roth IRA contribution in 2012 is $183,000 for married couples filing joint tax returns and $125,000 for individuals.

The good news is that the federal government in 2010 dropped the income limit for transferring savings to a Roth IRA from a traditional IRA.

So, yes, even if your income disqualifies you from making a contribution to a Roth IRA, you can make a contribution to a traditional IRA and then move those assets to a Roth in what is called a “conversion.”

Comments July 7, 2012

Be careful when making a conversion of a traditional IRA to a Roth IRA. None, some, or all of the conversion may be taxable as income. To determine which category you fall into check Form 8606 – you may have filed it with your federal tax return. It provides the post tax cost basis of contributions you made to your traditional IRA(s), which can reduce or eliminate taxes on your conversion. The useful information on Form 8606 could prevent you from being taxed twice.

Importantly, you cannot avoid being taxed on your conversion if the cumulative value of all your traditional IRAs is greater than the cost basis of all your IRAs. Work closely with your Financial Adviser when evaluating a conversion.

Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies.  He can be contacted at www.skloff.com or 908-464-3060.

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