Converting your IRA to a Roth IRA by Fredrick P. Niemann, a New Jersey IRA Estate Planning Lawyer

HNWElder Law, Estate Administration and Probate, Estate Planning

We all must pay taxes.  But when we pay certain taxes is a choice we can each make, especially when the rules change.  Making the right decision about converting a traditional IRA to a Roth IRA could save your estate thousands of dollars in income and estate taxes.

Until this year, taxpayers could only convert funds to a Roth IRA if their adjusted gross income was under $100,000.00.  Starting in 2010 conversion is open to anyone regardless of annual income.

Why could converting to a Roth IRA be beneficial?  A traditional IRA allows tax deductions for contributions and grows, tax-deferred.  A Roth IRA does not provide up-front deductions, but earnings and withdrawals are tax-free.  And unlike a traditional IRA which requires minimum distributions starting at age 70 1/2, a Roth IRA does not require minimum distributions during your lifetime.  A Roth IRA could provide a number of advantages depending on your age, the growth rate of your funds, and your total retirement needs.  Say you have a $1 million IRA balance and $300,000 in other funds.  If you convert to a Roth you could use the $300,000 to pay taxes.  Then the $1 million Roth IRA and all future earnings on it will not be taxed at withdrawal.  Further, as the law stands, in 2011 anything over $1 million in your estate would be taxed at a rate of at least 41% at your death.  In this case, converting could save estate taxes of $124,000.

Should you make the switch?  If you convert, you can undo the conversion or “recharacterize”, until October 15, 2011, the extended due date for 2010 tax returns.  If a stock increases dramatically in value you may choose to stay in the Roth IRA since withdrawals are tax-free; if the stock falls, you could un-do the conversion.

Converting to a Roth IRA could reduce the value of your estate for tax purposes, let you take distributions tax-free, and avoid minimum distribution requirements.

Do you have a question(s) not addressed here?  If so, contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or e-mail him at to schedule a consultation about your particular needs.  He welcomes your calls and inquiries and you’ll find him very approachable and easy to talk to.

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