Why You Shouldn’t Convert to a Roth IRA – Wall Street Journal – 06/14/10

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The Wall Street Journal

June 14, 2010

Why You Shouldn’t Convert to a Roth IRA

By Annie Gasparro

Comments June 14, 2010

Traditional IRA holders are not taxed on the post-tax value of their conversions.

For example, the conversion of a $20,000 traditional IRA with $20,000 of post-tax contributions would not be taxed.

Unfortunately, the IRS prohibits converting only post-tax portions of Traditional IRAs.

For example, the conversion of a $20,000 traditional IRA with $10,000 of post-tax contributions would only see 50% taxed, while the 50% that was post-tax contributions is not taxed. At the highest federal income tax of 35%, the $20,000 conversion would generate $3,500 in taxes.

One powerful way to offset federal income taxes from conversions is to simply make pre-tax contributions to employer sponsored retirement plans, such as 401(k)s, 403(b)s and 457(b)s. At the highest federal income tax of 35%, a $10,000 contribution would reduce your federal income taxes by $3,500 – a 100% offset to the second example above.

Unlike traditional IRA owners who must worry about Required Minimum Distributions (RMDs) starting at age 70 ½, Roth IRA owners are not subject to RMDs.

Note: Heirs who inherit Roth IRAs are subject to non-taxable RMDs.

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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